Recent flows into investment grade credit have gone into ESG-compliant funds. We expect this trend to continue. State Street develops ESG indices that have similar characteristics to broader benchmarks. This allows investors to improve their ESG rating while also continuing to track the broader indices. Higher ESG ratings are also associated with lower levels of volatility and provide some stability.
ESG Asset Gathering
The financial industry is constantly evolving and in many cases new legislation is the key driver. In the fixed income world this is especially true, with pension and insurance legislation having played a major role in shaping the curve.
The latest evolution in fixed income has been a shift towards ESG assets. These flows have been evident in the euro-denominated corporate bond market for some time, with the development of new legislation such as the EU’s SFDR1 rules acting as a catalyst. USD-denominated flows are also starting to pick up. This is a reflection of trends in wider society, but there has also been an acknowledgement that focusing on environmental, social and governance (ESG) considerations need not mean forfeiting investment performance.
1 The Sustainable Finance Disclosure Regulation imposes mandatory ESG disclosure obligations for asset managers and became effective on 10 March 2021.
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