Time to take action
Passive fixed income investors needn't be passive on ESG
More sustainable passive portfolios
When we think about sustainability, we often think first about high-impact solutions like microfinance or private equity. In the passive space, there are specialist ETFs, like green bonds or thematic equities, but the reality is that the bulk of assets track major benchmarks.
While some investors may be able to shift assets into specialist climate and social impact solutions, it is also vital to raise the standard of large core allocations. In fixed income, there is growing acceptance that ESG issues can and do impact performance and credit spreads.
The asymmetric profile of fixed income means that major downside risks (e.g. climate risks, and policy responses to those risks) cannot be ignored. It is also accepted that responsible investors should avoid certain controversial companies (e.g. those violating the UN Global Compact).
One can argue that such exclusions, if widely adopted, could have greater impact in bond markets than in equity markets.
At Tabula, we aim to help passive fixed income investors raise their game.
We don’t simply copy methodologies developed for equity markets. Instead, we work with leading index and ESG data providers to find the best approach for each segment of the fixed income market. Our ESG ETFs aim to deliver core exposure with meaningful improvement in ESG characteristics.
Passive investors and impact
Is exclusion more effective in bond markets?
The case for divestment, for example from fossil fuel companies, is that you are sending a strong negative signal. A large investor, or many investors acting together, could cause reputational issues for the company and/or drive its share price down.
The counterargument is that you have more influence as a shareholder with voting rights. When you divest, someone else with fewer scruples will buy those shares and won’t engage on critical issues, so perhaps the long-term impact is even negative?
Whoever is right, the impact of divesting is indirect and difficult to measure. Intuitively, however, divesting from bonds could have more impact than divesting from equities. Firstly, the argument about giving up voting rights does not apply. Secondly, while equities are “forever”, bonds have fixed terms. Particularly in capital-intensive sectors like Oil & Gas, issuers need to come to bond markets frequently to refinance.
Reliance on public bond markets is only likely to increase as more banks commit to net zero targets. While many companies can survive a long-term collapse in share price, few can survive if no one will lend them money.
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