ESG Investing in Corporate Bonds: Mind the Gap

Abstract

This research is the companion study of three previous research projects conducted at Amundi that address the issue of socially responsible investing (SRI) in the stock market (Berg et al., 2014; Bennani et al., 2018a; Drei et al., 2019). The underlying idea of this new study is to explore the impact of ESG investing on asset pricing in the corporate bond market. For that, we apply the methodologies that have been used by Bennani et al. (2018a) for testing ESG screening in active and passive management. n particular, we consider the sorted portfolio approach of Fama and French (1992), and the index optimization method that consists in minimizing the tracking risk with respect to the benchmark while controlling for the ESG excess score. Moreover, we test how ESG has impacted the cost of corporate debt. Three investment universes are analyzed: euro-denominated investment grade bonds, dollar-denominated investment grade bonds, and high-yield bonds. Results differ from one universe to another. In particular, we observe that ESG has had a more positive impact on EUR IG bonds in recent years than on the USD IG and HY investment universes. Nevertheless, we observe a common trend that ESG is increasingly integrated into the pricing of corporate bonds and is a concern when building an investment portfolio. Moreover, we also show that ESG does not only affect the demand side, but is also a significant factor when it comes to understanding the supply side.

Keywords: SRI, ESG investing, environmental, social, governance, asset pricing, active management, bond picking, passive management, credit rating, yield spread, cost of debt

JEL Classification: G10, M14, Q01