This snapshot explores how and where approaches to incorporating environmental, social and governance (ESG) factors in publicly traded fixed income securities have changed from 2017 to 2019, based on current practices among the PRI’s global signatory base1.
Fixed income overview (page 5)
In 2019, 1,706 signatories reported on US$38trn in fixed income assets – approximately 41% of total PRI signatory AUM (US$91.9trn2)
The fixed income assets were distributed across the following instruments:
|Fixed income assets||US$38trn|
|Sovereign, Supranational and Agency (SSA) bonds||48%|
|Non-financial corporate bonds||26%|
|Financial corporate bonds||15%|
The fixed income assets were distributed across the following geographies:
- North America (44.8%)
- Europe (41.2%)
- Asia (10.3%)
- South America, Oceania and Africa (each representing less than 2%)
Screening (pages 8, 11 and 12)
On a like-for-like basis, the screening technique, if used alone, shrank from 20% in 2017 to 14% in 2019, but it went up if used in combination with other techniques. Negative/exclusionary screening was still the most-used screening method across all types of bonds (reported by 95% of signatories in 2019 compared to 90% in 2017).
The second most-popular option is norms-based screening (65% in 2019 compared to 55% in 2017), while 61% of signatories reported implementing positive/best-in-class screening – a more sophisticated practice – as opposed to 52% in 2017.
To ensure that screening criteria are respected, PRI signatories have implemented various safeguards. The most popular option was to analyse issuers, followed by updating the data used for screening criteria at least once a year, regardless of the approach taken (negative, positive or norm-based).
The use of automated IT systems to prevent portfolio managers from investing in excluded issuers or securities was a less common practice, while the least used was conducting annual internal audits of fund holdings. Implementing these systems appears to be resource-intensive, as the majority of large investors (89% of signatories managing more than US$250bn) used them to enforce negative screens in 2019, compared to smaller firms (17% of signatories with less than US$1bn AUM).
Thematic investments (pages 8, 14, 15)
Signatories that use thematic strategies for fixed income3 typically do not use them in isolation but combined with screening techniques (up to 41% in 2019, from 32% in 2019 on a like-for-like basis). Those who reported investing in thematic bonds chose from:
- bonds linked to environmental goals, including green bonds and SDG-linked bonds related to environmental goals only (69%);
- bonds linked to social goals, which including social bonds and SDG-linked bonds related to social goals (33%);
- bonds linked to environmental and social goals (39%).
To ensure the issuers of thematic investments fulfil their ESG obligations:
- Two-thirds of signatories required that themed bond proceeds were only allocated to environmentally or socially beneficial projects, and
- Some 62% of signatories required the issuer to demonstrate how they determine which projects are eligible to receive themed bond proceeds.
ESG data integration (pages 8, 16)
Integration techniques alone remained roughly stable (representing just over 25% of fixed income investments in 2017 and in 2019).
Among the ESG integration methods available to investors, integrating ESG analysis into fundamental analysis was by far the most popular (favoured by 92% of signatories), followed by ranking an issuer relative to a chosen peer group using ESG factors (69%), adjusting issuers’ internal credit assessments (68%) and integrating ESG analysis into portfolio weighting decisions (66%). More advanced practices, such as sensitivity analysis and scenario analysis, were less frequent.
Engagement (pages 17 – 20)
Primarily implemented by equity investors, the use of engagement strategies by fixed income investors has grown, as they increasingly communicate with issuers to identify, monitor and manage ESG risks and work with them towards better practices.
Indeed, 27% of PRI signatories engaged on more than 50% of their fixed income AUM (for all debt instruments) in 2019, compared to only 14% only in 2017. Similarly, the number of signatories who did not engage on any of their fixed income assets shrank significantly – from 43% in 2017 to 7% in 2019.
Engagement with corporates (financial and non-financial) has been more widespread than with SSA issuers. In 2019, 30% of signatories engaged with corporate issuers for more than 50% of their AUM, compared to 21% who engaged with SSA issuers. Moreover, only 2% of signatories did not engage at all on their corporate bond holdings in 2019, while this figure increased to 20% for SSA bonds.
In 2019, most signatories (90%) reported that their engagements were individual, based on internal staff interactions. Some 86% of signatories in 2019 engaged post-investment, while 77% engaged pre-investment. Over the two years, most signatories (95%) engaged on ESG risks and opportunities affecting a specific bond issue or its issuers. However, an increasing number (60% in 2019 compared to 43% in 2017) also engaged on specific systemic ESG issues (such as human rights).
Performance and outcomes (page 21)
The PRI’s reporting and assessment process aims to facilitate learning and development for signatories, outlining how their implementation of responsible investment compares year-on-year, and to identify how signatories can improve these practices.
- Signatories that were delisted between 2017 and 2019 who reported in the 2017 reporting cycle scored below average, as measured by the PRI’s scoring methodology.
- New reporting signatories in 2019 typically tended to underperform compared to the overall average of signatories that reported in the 2019 reporting cycle.
- Signatories that reported in 2017 and 2019 improved over time, with greater numbers of signatories adopting ESG practices.
Signatories were asked how they measure the performance of investments incorporating ESG considerations/approaches, based on increasing returns, decreasing risk and/or shaping sustainability outcomes:
- Half of signatories did not measure the ESG impact on risk or returns for any of their fixed income investments.
- One-third measure whether incorporating ESG factors impacts portfolio risk.
- Thirty-one percent measure whether incorporating ESG factors impacts portfolio returns, while the same proportion measure the ESG performance/profile of portfolios (relative to a benchmark).
Passive investing (page 25)
The use of indices enhanced by or constructed from ESG factors was the most common way signatories applied responsible investment to passively managed fixed income assets.
Some signatories screened the constituents of externally produced indices as well, either by applying their own responsible investment policies or by acting on client instructions.
Learn more about the PRI’s work on passive investments.
1 Within the PRI’s Reporting Framework, fixed income instruments refer to any form of debt financing provided by investors (loans, bonds or any other debt instrument, such as notes) to sovereign, sub-sovereign, supranational or corporate borrowers (and, in the latter case, this includes the subsidiaries or special purpose vehicles of corporate entities).
2 With the exception of the total AUM mentioned on our website and Annual Report, any asset class AUM figures presented contain some double counting.
3 Based on ICMA definitions of green, social and sustainability bonds used in the Reporting Framework.