Do green bonds deliver for fixed income investors?
Our sustainable funds are constructed as a logical extension of our integration approach. We believe environmental, social and governance (ESG) factors can have a material influence on the value of our investments, which is why we incorporate an ESG integrated approach across all our funds. We think that we do this in an innovative and robust way.
When our clients expressed an interest in a specifically ‘sustainable’ fund, we thought we could develop a more intelligent way of incorporating sustainability goals into credit investing, one that would meet investors’ ESG values while allowing them to benefit from the specialist, active approach of TwentyFour’s portfolio management team. In essence, because of the data based ESG integration model we had the methodological framework to extend our capabilities by overlaying a negative and a positive screen. The key to this step lies in deciding what negative screens make sense to investors and how to reward (positively screen) those companies with good ESG profiles. What we found was crucial however was to carry out the research in order to confirm that the combination of screens did not destroy risk adjusted return to the investor. We publish the simulation work we carried out to establish the optimum positive screen in the white paper 'ESG at TwentyFour'.
With this analysis behind us we created the Sustainable Short Term Bond Income fund (SSTBI) designed to meet robust sustainability criteria while targeting returns of 250bp over Libor and keeping volatility below 3% at all times.
SSTBI – is based on TwentyFour’s existing low-volatility Absolute Return Credit strategy –and incorporates a negative screen that rules out all the sectors investors concerned with sustainability would expect, but crucially then adds a positive screen, meaning companies are purposely rewarded for doing the right things.
ESG issues can be a risk to fixed income returns like any other, and at TwentyFour we have embedded the assessment of these issues in our existing investment process and relative value models across the firm, with an integrated ESG framework used daily by portfolio managers for all strategies.
However, in recent years many investors have begun to consider sustainability a key element of their own investment objectives, and have sought products that specifically avoid investing in companies perceived to operate in an unsustainable way, either for their own business or wider society and eco system.
Unfortunately, especially within fixed income where ESG data availability can be poor compared to publically quoted equities, there are a range of definitions for and approaches to sustainable investing, and it is clear to us that many of these may not work for investors in the way they should.
We believe the objective of sustainable investing should be to at least maintain investor returns while playing a part in promoting better environmental, social and governance outcomes
Our research has shown that with the right combination of positive and negative screening, stated sustainability criteria do not have to detract from returns
A focus on more nuanced factors such as controversies, engagement and momentum in ESG analysis can potentially deliver higher returns and better ESG outcomes
TwentyFour’s ESG framework puts the onus on the team’s own credit work, rather than solely relying on third party analysts or data providers
Regulatory initiatives are increasingly pushing asset owners into more sustainable strategies, and we expect companies seen as running sustainable businesses to benefit from increased capital flows in the coming years