Environmental, social, and governance (ESG) considerations have increasingly entered the mainstream of investment discussions, both through routine incorporation into traditional investment processes and through distinct sustainable or impact investing styles. Recent and current global conditions, such as extreme weather events, the inequitable effects of the COVID-19 pandemic, rising distrust of government institutions, and geopolitical challenges to a rules-based world order, have accelerated this trend
, emphasizing the direct relevance of ESG and sustainability to understanding long-term market risks and opportunities.
Until recently, equity investors were more concerned with ESG and sustainability than their fixed-income counterparts. That is, however, beginning to change, and at a rapid pace. ESG and sustainability have gained significant traction among bond investors, particularly since the implementation of COVID-19, and are now widely regarded as essential components of fixed income investing. For example, global sustainable debt issuance reached a new high of over US$1.6 trillion in 2021 and is expected to rise further in the coming years. Notably, we believe that ESG integration and sustainable fixed-income investing
require a very deliberate, thoughtful approach — one that varies significantly from one fixed-income sector to the next.
ESG and sustainability:
At a high level, researchers believe that increased awareness of ESG and sustainability benefits global markets in two ways:
1. ESG integration allows market participants to think more holistically about the types of financially material risks and opportunities — such as physical, reputational, and (geo)political — that should ideally be reflected in asset valuations and taken into account during the routine portfolio construction and management process.
2. Furthermore, the conversation about sustainable investing
is encouraging more market participants to look beyond narrow, issuer-specific investment thesis to consider how market participants' behaviors affect the broader systems and structures (e.g., climate stability, institutional strength) whose long-term viability is critical for the long-term health of economies and markets.
We, like many others, believe that a stable global climate, clean air and water for all, adherence to the rule of law, strong institutions with broad public legitimacy, and broad-based access to economic opportunity are valuable public goods from which market participants would benefit collectively over time. As a result, a central goal of sustainable investing is to assist markets in evolving toward rewarding participants for exercising responsible stewardship of these public goods, which are critical to pursuing favorable long-term outcomes for the real people who are the ultimate beneficiaries of markets. This framing of sustainability highlights why fixed income is so important in moving global markets and economies in a more sustainable direction.