ESG overlay improves outcomes for corporate bond investors
Investors can benefit from lower drawdowns, reduced portfolio volatility and even increased returns, according to J.P. Morgan Asset Management
Quantitative research shows that incorporating ESG (environmental, social and governance) factors has a positive impact on returns for corporate bond investors, according to a new report released by J.P. Morgan Asset Management.
Systematic back-testing of corporate bond portfolios proves that an ESG overlay can enhance portfolio outcomes via lower drawdowns, reduced portfolio volatility and, in some cases, marginally increased risk-adjusted returns.
The report, “Systematically Investing in ESG in Global Bond Markets,” leveraged proprietary J.P. Morgan quantitative analysis to overlay MSCI ESG scores on investment-grade, high-yield and emerging market debt, as represented by the asset classes’ respective ICE Bank of America Merrill Lynch (BofAML) global corporate bond indices.
In seeking to test how these MSCI ESG ratings work in practice, the report considered:
--Whether ESG scores differed from traditional agency credit ratings (i.e. if credit rating agencies fully factor ESG liabilities into their ratings)
--If E, S and G factors were correlated to one another
--Most importantly, if bonds with higher ESG scores actually demonstrated enhanced investment performance
“Our key finding was that an active, ESG-tilted bond portfolio strategy does generate superior outcomes compared to a relevant benchmark that does not explicitly take ESG scores into account,” says Bhupinder Bahra, co-head of Quantitative Research Group, Global Fixed Income, Currency & Commodities (GFICC), J.P. Morgan Asset Management.
“Constructing a corporate bond portfolio with higher ESG scores clearly results in alpha opportunities. Utilizing an ESG overlay produces smoother returns over time, helps to immunize against volatility and in some cases marginally increases risk-adjusted returns. Our back-testing demonstrated MSCI ESG scores are additive to traditional credit ratings; the contingent liabilities related to ESG issues are not necessarily factored into rating agencies’ assigned ratings,” adds report co-author Lovjit Thukral, vice president, GFICC.
J.P. Morgan Asset Management’s Global Fixed Income, Currency & Commodities team manages over US$500 billion in assets under management, working in every major market around the world, and utilizing a rigorous, proprietary research process to scan the markets for investment opportunities across all sectors. One hundred percent of the firm’s GFICC assets under management are ESG integrated.
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