Fixed income is frequently referred to as the world’s largest asset class. Pension funds, insurers, sovereign wealth fund and banks allocate significant portions of their assets under management (AUM) to capital markets with an expectation of reliable if unremarkable returns. But during the past decade, the Eurozone debt crisis, the sub-prime mortgage crisis, and countless high-profile corporate defaults have served to remind investors just how much they stand to lose when things turn sour. Many corporate and even sovereign blow-ups can be attributed, at least in part, to environmental, sovereign and governance (ESG) factors which were not identified in traditional credit analysis models. Responsible investment (RI) offers fixed income investors a way to address this information gap.
RI is not a new thing, nor is it very different from orthodox investment strategies, it’s simply about doing things better. In a fixed income context it means thinking about how issues like carbon regulation, poor labour relations, and corruption might affect issuers’ creditworthiness. Ultimately ESG issues can affect investment performance and institutional investors are increasingly using ESG analysis as a way of gaining additional insight into bond prices and portfolio risk. Stewardship – active engagement with the issuers in which one invests – also helps investors to gain important information about their exposure to ESG related risks and helps them to manage those risks.
About the work stream
The PRI Initiative works with its signatories to promote responsible investment in fixed income. The priorities of this work stream are to:
- explore the extent to which ESG factors are material to credit strength;
- provide guidance on, and examples of, implementation of the Principles; and
- reach out to key stakeholders including credit rating agencies, media, regulators and intermediaries to promote understanding of responsible investment in fixed income.
The fixed income work stream is governed by a steering committee of signatories. In December 2014, the PRI Fixed Income Steering Committee launched two new sub-committees to focus on outreach and engagement. Any PRI signatory may apply to join one of these sub-committees.Those interested should review the terms of reference below which contains information on how to apply for a seat.
Join the Engagement Sub-Committee
There are two primary purposes of the engagement sub-committee. Firstly to engage credit rating agencies (CRAs), index providers and other capital market stakeholders on integrating ESG related risks into credit rating models. Second, to promote and support greater levels of engagement by debtholders with issuers on ESG related risks. These two objectives will be split into two distinct phases and will run consecutively.
Join the Outreach Sub-Committee
The outreach sub-committee will help PRI promote responsible investment as good practice in fixed income. The objectives will be to broaden the understanding of responsible investment among capital market stakeholders and to encourage robust implementation of the Principles. Key stakeholders include asset owners, such as pension funds and insurers, mainstream investment managers, service providers, and intermediaries such as banks and brokers. Other stakeholders include media outlets, regulators, industry associations and issuers of debt.
Resources listed may require PRI signatory extranet access.
- Fixed income investor guide (September 2014)
- Corporate Bonds: Spotlight on ESG Risks (December 2013)
- Sovereign Bonds: Spotlight on ESG Risks (September 2013)
- Fixed income discussion paper (June 2011)
- Responsible investment in fixed income (London, 4 February 2014) – includes a written overview of the event, session presentations and associated news articles
- Responsible investment in emerging market debt (October 2013) – presentation slides and audio recording
- Responsible investment and sovereign debt – what are the links? (June 2012)
- Fixed income: key challenges for the responsible investor (September 2011)
- Linking ESG issues and corporate creditworthiness (October 2012)
- Linking ESG issues and sovereign creditworthiness (October 2012)
- Corporate Fixed Income: Strategies for the Responsible Investor (October 2011)
- Green bonds – a viable alternative for fixed income investors? (August 2011)