Sustainable Systematic Credit

59 Pages Posted: 13 Sep 2021 Last revised: 21 Oct 2021

See all articles by Peter Diep

Peter Diep

AQR Capital Management, LLC

Lukasz Pomorski

AQR Capital Management, LLC

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Date Written: September 7, 2021

Abstract

Interest in sustainable investing has exploded in recent years, initially focused on public equity markets, but now evolving into fixed income. We assess various aspects of sustainable investing for developed market corporate bond markets (both Investment Grade and High Yield). Using a representative set of sustainability measures spanning environment, societal and governance (ESG) constructs we find: (i) credit spreads are only marginally associated with ESG measures, (ii) ESG measures are only marginally associated with standard return forecasting measures for corporate bonds, (iii) ESG measures are not reliably associated with future credit excess returns, and (iv) ESG measures are negatively associated with the future volatility of credit excess returns. While the direct investment impact of sustainability is modest, there is still considerable interest from asset owners to ensure credit allocations are sustainable. We find that it is possible to incorporate (i) both static and dynamic exclusion screens, (ii) positive tilts toward more sustainable issuers, and (iii) economically meaningful reduction in carbon intensity, with minimal portfolio distortions. Thus, a well-implemented systematic approach has the potential to offer attractive risk-adjusted returns in a sustainable manner.

Keywords: ESG, credit, fixed income, portfolio choice, socially responsible investing, CSR

JEL Classification: G11, G12, G23, G34, M14, Q01, Q5

Suggested Citation

Diep, Peter and Pomorski, Lukasz and Richardson, Scott Anthony, Sustainable Systematic Credit (September 7, 2021). Available at SSRN: https://ssrn.com/abstract=3920988 or http://dx.doi.org/10.2139/ssrn.3920988

Peter Diep

AQR Capital Management, LLC ( email )

2 Greenwich Plaza
Greenwich, CT
United States

Lukasz Pomorski

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Scott Anthony Richardson (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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