Bonds with Benefits: Impact Investing in Corporate Debt

Abstract

The regulatory focus on quantifiable sustainable investing shifts investors’ demand towards impact products, thus challenging their alignment with the primary target of outperformance. Our study demonstrates the implications of impact investing on actively managed systematic credit portfolios using emission intensities, SDGs, and green bonds. We discover that sustainable assets trade at tighter spreads than their peers and provide coherent evidence of impact pricing. Nonetheless, neither impact measure exhibits a significant return premium. Finally, impact investors generate at most market returns, while systematic investors benefit from the low correlation between credit factors and impact measures to achieve their preferred dual target.

Keywords: Corporate bonds, impact investing, sustainability, systematic factors, credit factor investing

JEL Classification: G11, G12, G18, Q54