The Case for Integrating ESG into Fixed Income Portfolios
35 Pages Posted: 18 Jul 2022
Date Written: June 30, 2022
Abstract
In this paper we investigate the possible benefits of integrating ESG considerations into fixed income portfolio construction. When we create portfolios ranked by a composite ESG value or by an environmental ranking we find evidence to suggest that higher ESG rankings produce an improvement in risk-adjusted returns. When we use industry-standard tilting methodologies we find that portfolios can be tilted towards a particular ESG characteristic without having a material effect on the risk and return characteristics of the portfolios. Finally, we find some limited evidence to suggest that enhancing the ESG credentials of a portfolio can lead to a reduction in the tail risk of a portfolio, that is, it helps to reduce the frequency of extreme downside outcomes.
Keywords: ESG, fixed income portfolios
JEL Classification: G0
Suggested Citation: Suggested Citation