ESG High-Yield Bonds Don’t Hurt Returns … But They Don’t Boost Them Either

Research from CIO Martin Fridson finds no statistically significant difference attributable to ESG factors.


Do investors have to sacrifice return to follow environmental, social, and governance (ESG) principles? That question is at the heart of the ESG debate, and is one that Martin Fridson, CIO of Lehmann, Livian, Fridson Advisors, has attempted to answer through ongoing research of the topic. However, his most recent findings are likely to disappoint investors on both sides of the issue.

Fridson’s analysis, which centers on the high-yield bond market, attempts to identify a residual ESG-related effect in the March returns of three high-yield ESG-based indexes: the ICE US High Yield ESG Tilt Index, the ICE US High Yield Duration-Matched ESG Tilt Index, and the ICE US High Yield Best-in-Class ESG Index.

The research, which was published by S&P Global Market Intelligence, looked at the selection process of the ESG Tilt and Duration-Matched ESG Tilt indexes, and found that they incorporate ESG objectives only by excluding bonds of issuers with significant exposure to controversial weapons, such as anti-personnel mines, nuclear weapons, cluster weapons, biological and chemical weapons, depleted uranium, and white phosphorus munitions. The analysis also focused on bonds with favorable ESG scores, as determined by Sustainalytics, and that are included in the best-in-class index, while those with unfavorable ESG scores are excluded. Fridson refers to the two categories as “bad citizens” and “good citizens.”

Fridson’s research found that the good citizens outperformed ESG bad citizens during the March sell-off by a statistically significant margin of 1.68 percentage points. But there is wrinkle to that.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

“On the face of it, high-yield investors were actually rewarded for high-mindedly restricting their holdings to bonds of companies with commendable environmental, social, and governance practices,” said the report. “Examination of the underlying data casts doubt on that conclusion, however.”

Fridson’s findings suggest that the reason the good citizens outperformed the bad ones had more to do with the fact that they had higher ratings. The report notes that 12.7% of the bad citizens were rated CCC1 or lower, compared with only 4.1% for the good citizens.

High-yield investors “need not sacrifice return to adhere to investment rules that exclude bonds of issuers they find objectionable on environmental, social, and governance grounds,” said the report. However, it also said that the findings “do not support, in the case of high-yield bonds, the contention of some proponents that concentrating on issues with favorable ESG scores increases investment performance.”

The report said that if issuers without significant involvement in controversial weapons, or that have favorable ESG scores, are inherently less risky than like-rated issuers that lack those characteristics, the bonds should beat the conventional high-yield index “most handily” in periods of sharply rising risk aversion. However, the research found no statistically significant performance differential that could be attributed to ESG factors.

“We conclude that high-yield investors are neither rewarded nor penalized for being on the side of the angels on a full array of environmental, social, and governance matters,” said the report.

Related Stories:

ESG-Friendly Stocks Have Done Better in Virus Downturn, BofA Says

DOL Proposal Will Chill ESG Corporate Pension Investing, Advocates Say

COVID-19 Creates New Factors for Due Diligence and ESG

Tags: , , , , , , ,

How COVID-19 Will Change the Investing Landscape

CPPIB says it’s critical for long-term investors to understand ‘generational shifts’ caused by the pandemic.


The COVID-19 pandemic will significantly change the long-term investing landscape, particularly concerning consumer behavior, health care, and mobility trends, according to a new report from the Canada Pension Plan Investment Board (CPPIB).

Global crises such as world wars and the COVID-19 pandemic can cause national priorities to change, drive new alliances, and reshape the geopolitical landscape, said CPPIB.

“For long-term investors, it is critical to understand these generational shifts,” according to the report. “They signal where demand is likely to reside in the future, where the new sources of innovation and disruption will come from, and how changing policies and regulations will reshape economies, all of which can have direct impact on a global portfolio.”

One of the most significant changes to consumer behavior, the report said, will be the greater adoption of ecommerce among older consumers. In a reversal of pre-pandemic trends, older consumers, who are at a higher risk of contracting COVID-19, say they plan to increase ecommerce adoption across all categories. Meanwhile, younger consumers, who have grown tired of being cooped up, have indicated an increasing desire to return to stores for more discretionary categories.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

“Confined to their homes for months and subjected to a rapid reordering of their perceived health risks and economic prospects, consumers are emerging from a shared trauma that will change their priorities and concerns for years to come,” said the report

According to CPPIB’s research, online grocery usage has surged during the pandemic, with 31% of US households using the services in March, up from 13% in August 2019. Retail giants Amazon and Walmart had an enormous advantage over smaller retailers that had more limited selections and unscalable infrastructure. CPPIB also said free and reliable delivery, which are the biggest factors in consumer uptake, also play in the bigger retailers’ favor.

The report cited telehealth as another pandemic-driven trend that will change the investing landscape. While only 20% of the population in the countries the report looked at used telehealth, one-third of those who tried it did so for the first time during the pandemic.

The workforce’s acceptance of remote working during the pandemic will also have a significant impact on long-term investing, according to the report. A trend of remote working that was slowly building before COVID-19 accelerated rapidly during the pandemic, with approximately half of workers in China, the UK and the US working from home, up 10-fold from 5% or fewer. The report said both employers and employees found the arrangement more satisfactory than expected, with several large companies, such as Facebook, Bank of Montreal, Tata Consultancy Services, and Optus announcing long-term plans to increase work-from-home arrangements.

“We expect a long-term uptick in remote work, though more in the form of flexible schedules that allow for a few days per week at home, rather than a wholesale abandonment of the office,” said the report, which added that companies enabling remote work, automation, and sectors that focus on office sanitation are likely to receive a boost from the pandemic.

The report also said the remote working trend will have significant collateral effects, such as a possible population shift away from large urban centers. With greater geographic flexibility in employment, employees looking for more space and fewer crowds will migrate farther from the city center, according to the report, which said this will likely accelerate the growth of so-called “tier 2 cities” in the US and Europe.

“Managing risk while recognizing true opportunity is an essential task for the long-term investor,” the report said. “It is what enables us to fund the enterprises that will lead the world to a safer, more sustainable future.”

Related Stories:

Long-Range Investing, a Decline in Births, and a Fertility Rate that’s Scared of COVID-19

Pension Debt Expected to Surge Due to COVID-19 Volatility

Local Government Pension Funded Ratios Hold Steady Amid COVID-19

Tags: , , , , , , , , , , ,

«