ESG under the alpha lens
We find compelling evidence that ESG research deserves a place in credit investing, as high ESG scores reduce exposure to tail risk and enhance long-term returns.
Our “high ESG” bond portfolio shows 8% outperformance versus our “low ESG” bond portfolio. We also find negative returns to be larger and relatively more frequent among bonds from issuers with lower ESG ratings compared with bonds from issuers with higher ESG ratings. Additionally, our data clearly indicates that changes in ESG ratings act as a leading indicator of
creditworthiness. Taken altogether, we find ESG screening to be a useful tool for credit investors.
Investors, consumers and regulators are all starting to realise the cost of being unsustainable,
and focus is increasingly being directed towards ESG factors in credit investing. We find strong
arguments for why it makes sense to incorporate ESG into credit investing decisions.
Our analysis of investment grade corporate bond portfolios based on MSCI’s ESG scores shows that high ESG scores contribute to more stable portfolio returns during periods of high market volatility, which in turn has led to enhanced long-term returns. In addition, we find that ESG trends show merits as leading indicators of creditworthiness.
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