- ESG Investing in Corporate Bonds: Mind the Gap
ESG Investing in Corporate Bonds: Mind the Gap
Thursday 13 February 2020
Research / Market
This research is the companion study of three previous research projects conducted at Amundi that address the issue of socially responsible investing (SRI) in the stock market (Berg et al., 2014; Bennani et al., 2018a; Drei et al., 2019). The underlying idea of this new study is to explore the impact of ESG investing on asset pricing in the corporate bond market. For that, we apply the methodologies that have been used by Bennani et al. (2018a) for testing ESG screening in active and passive management. In particular, we consider the sorted portfolio approach of Fama and French (1992), and the index optimization method that consists in minimizing the tracking risk with respect to the benchmark while controlling for the ESG excess score. Moreover, we test how ESG has impacted the cost of corporate debt. Three investment universes are analyzed: euro-denominated investment grade bonds, dollar-denominated investment grade bonds, and high-yield bonds. Results differ from one universe to another. In particular, we observe that ESG has had a more positive impact on EUR IG bonds in recent years than on the USD IG and HY investment universes. Nevertheless, we observe a common trend that ESG is increasingly integrated into the pricing of corporate bonds and is a concern when building an investment portfolio. Moreover, we also show that ESG does not only affect the demand side, but is also a significant factor when it comes to understanding the supply side.
Global Investment Views - February 2020
At the start of the 2020s, markets continued to be dominated by geopolitical issues, with short-lived Iran tensions at the forefront initially, followed by the news regarding a phase one trade deal between the US and China. Now, growth expectations are becoming the main driver of the market. That’s why the recent volatility due to the news about the spreading of the corona virus in China is higher than in the case of US-Iran tensions, as the epidemic could harm China (and global growth) if not contained soon (not our base case at the moment). Other than this issue, recent data point to a ‘so far, so good’ assessment as Germany has avoided a recession and the Euro area is bottoming out. Inflation uptrends are materialising to some extent, but risks appear to be limited and the overall inflation outlook remains benign. Central banks are likely to continue to pause on policy changes, which should help to maintain dovish financial conditions across regions. Therefore, in the search for further growth, attention is globally moving towards fiscal measures: Japanese stimulus package; approval of 2020 Budget Laws for Indonesia, the Philippines and India; and hopes for support in Germany, the UK and broader Europe (€1tn European Green Deal).
Focus on fundamentals: virus volatility provides entry points for EM equities
Overview: The coronavirus has been the strongest driver behind the recent volatility in financial markets, providing the trigger for a break in the rally in risk assets, which had been running uninterrupted since October. We should be aware that the trough for markets could be well in advance of the peak of the epidemic, as markets tend to overreact at the beginning of a crisis and then stabilise and rebound, despite the continuation of the negative news flow.
Don’t panic: market overreactions may turn into opportunities for long term investors
The epidemiological characteristics of this pandemic (low mortality rate, probably much less than the 2% reported for the whole population and in any case less than 0.5% for the labour force) suggest that the impact of the epidemic should prove “short-lived” (first half of the year). An epidemic of this nature affects neither demography nor physical capital, provided that the policy mix is adequately calibrated, with a full mobilisation of fiscal tools.