Russell Investments has seen rapid growth in ESG integration practice among fixed income asset managers. The findings in this paper are from surveys and discussions with fixed income market practitioners. Focusing on ESG considerations and implementations in investment processes Russell Investments shares 10 key ESG integration trends in the market for fixed income.

10 key ESG integration trends:

Trends 1 & 2 look at ESG for fixed income investing and the urgency surrounding this topic. The report outlines the primary fiduciary roles between both equity and fixed income investors and describes the key differences. The long-term character of fixed income investing makes the integration of ESG factors suitable as they are also typically long-term focused.

Trend 3 looks at ESG data coverage availability in the market for fixed income. The availability of data has been more broadly adapted in the corporate credit market due to the relation between corporate bonds and equities which allows the transferral of ESG considerations. However, ESG integration is slower into sovereign and municipal bonds.

Trend 4 focuses on engagement where fixed income market practitioners have started to utilise the terminology as part of their ESG integration practice. This is more common with market practitioners that have bond and equity offerings than those with bond only offerings. The paper discusses methods of engagement and different ways to increase leverage and influence companies.

Trend 5 looks at the use of distinct ESG teams vs. integrated investment teams. Practitioners with large asset bases usually have their own ESG team while small asset owners tend to leverage an existing investment team. There is no best practice, instead it depends on the firm.

Trend 6 explores the integration of ESG data. The paper highlights data sources, whether that be through third party ESG data providers, internally produced data or a combination, and how data is incorporated into their investment process.

Trends 7 & 8 details reporting and the two-fold demand for metrics driven reporting: one being for ESG criteria broadly and the other for climate related metrics such as carbon footprint. Asset owners increasingly demand greater transparency of ESG considerations, however, there is no standardised reporting across firms. There is increased demand for climate change reporting, which also lacks standardisation. However, the creation of the Task Force on Climate-related Financial Disclosures (TCFD) has expanded reporting efforts with support from over 930 organisations.

Trends 9 & 10 looks at the product offerings available in the market for fixed income, focusing on impact investing. The growth and scale of sustainable investment products in fixed income and the types of sustainable investing strategies offered are discussed. Themed investing has seen the highest growth with targeted strategies towards the Sustainable Development Goals (SDGs). Regarding impact investing, the paper looks at three primary categories of green, social and sustainability bonds. The key features of these products understand how proceeds are used and to monitor the actual vs stated objects highlighting the importance of a well-defined investment framework.

1. The primary difference (with fixed income investing) is the fiduciary duty associated with proxy voting and shareholder engagement for equity investors.
2. The rapid expansion in market practitioners embracing ESG integration in fixed income is varied. However, lagging countries are playing catch up due to pressure from the global growth in ESG integration. It can be seen practitioners based in the United States have progressed the least when compared to those based in Europe, UK, Australia and New Zealand.
3. Within fixed income ESG integration has been more broadly adapted in the corporate credit market at first. This is due to corporate bonds relation with equity, that allows equity coverage in ESG considerations to be transported into the corporate credit market.
4. In Russell Investments 2019 Annual ESG Manager Survey it can be seen that 89% of market practitioners with both equity and bond offerings and 71% of market practitioners with bond-only offerings claim they often or always discuss ESG topics when they interface with companies they are invested in.
5. Many market practitioners have an ESG or responsible investing team that is distinct from their investment team.
6. Market practitioners are increasingly incorporating quantitative or metric-driven ESG data into their investment processes. This can be by utilising third-party data as inputs and form their own ESG insights.
7. While asset owners are demanding greater transparency around ESG considerations in their portfolio reporting, reporting formats often vary according to each asset owner’s content preferences. Thus, it is hard to get a clear standard as ESG means different for things to different people.
8. In climate-related reporting, many market practitioners report relative carbon footprint, such as tons of CO2-equivalent emission per revenue dollar. Some practitioners report projected annual CO2 emissions savings.
9. From 2016-2018 the largest category for the sustainable investing strategies was negative/exclusionary screening.
10. Important considerations for impact investing include having a well-defined investment framework detailing investment opportunity, infrastructure to exploit the market and defined reporting systems.