Publications

ESG-Enhanced Corporate Bond Indices: A Strategic Allocation

Corporate bonds selected on the basis of both ESG integration and exclusion at the issuer level can replace vanilla corporate bonds — this approach has historically reduced portfolio risk. From our analysis, we can see that ESG-enhanced corporate bonds have consistently tilted towards higher credit quality investment grade bonds.


Overview

In this paper, we examine how to incorporate ESG-enhanced corporate bonds into an investment portfolio from a strategic asset allocation standpoint. To this end, we examine the differences between ESG-enhanced corporate bond indices, namely the Bloomberg SASB US Corporate ESG Ex-Controversies Select Index and the Bloomberg SASB Euro Corporate ESG Ex- Controversies Select Index, and their traditional market-value weighted counterparts.

As a reminder, the Bloomberg SASB Corporate ESG Ex-Controversies Select indices utilise both an ESG exclusion1  and integration approach and are designed to target bonds whose issuers have an enhanced ESG profile while keeping in check their active risk to the market value-weighted corporate bond indices.

How to Incorporate ESG-Enhanced Corporate Bonds in a Portfolio Context

ESG-enhanced corporate bonds can form part of a strategic (core) allocation within investment portfolios. Compared to broad-based corporate bond indices, bond indices with a focus on issuers with a strong ESG profile are often less volatile by virtue of their tilt towards higher grade bonds. In turn, this can improve the overall risk-return efficiency of investment portfolios. Along with a reduction in volatility, the inclusion of bonds whose issuers have an enhanced ESG profile undoubtedly improves the ESG profile of the portfolios too.

Click here to read the full paper

 

Share