Genevra Banszky von Ambroz, sustainable portfolio manager at Tilney, says that if a short-dated bond passes an ESG screen, an investor has the advantage that the yield is likely to be the same as on a short-dated bond that would not pass such a sustainability screen, meaning that an investor does not need to sacrifice yield but can also attain investments that correspond to their sustainability criteria.
Short-dated bonds also tend to offer protection against inflation and so are also potentially a diversifier in portfolios of all kinds.
This may be particularly important in sustainable investment portfolios as they may be overly exposed to growth equities, which are vulnerable to higher inflation (see article four in this guide).
Rust says that under the sustainable finance disclosures regulation, an investor is required to monitor the governance and ensure that the company to which one is assigning capital is run by people who are “good actors”, that is, who are intent on delivering on the promises they make.
Liquidity
Padhraic Garvey, an economist at ING, says there is a reputation among many market participants that fixed income ESG investors “buy and hold” and this can mean liquidity is an issue. But he says that as the sector has evolved in recent years, with more issuance happening, liquidity is no longer a problem.
The fact that bond investors in the ESG space may hold their bonds right to maturity helps to influence the behaviours of the companies in which they are invested, but – according to the ING analysis – without sacrificing liquidity.
Obviously liquidity could suffer if the intention is to hold bonds to maturity, as when clients intend to make withdrawals the cash for this has to come from somewhere, either from inflows or from selling bonds or from holding onto cash.
But also, if most bond buyers hold on, then it can be hard, in the context of a multi-asset portfolio, for an adviser to buy more of the same bonds for new clients as money comes in, as not enough would be for sale.
This would lead to the problem of bigger advice businesses or wealth managers being unable to access the green bonds they want.
Garvey says his analysis also shows that because ESG-related bonds tend to be held for longer periods, the volatility in the pricing tends to be much lower than among conventional bonds, and that may help with diversification when used in the context of a winder multi-asset portfolio.
