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An asset owner’s guide to fixed-income ESG integration

|Investments
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By Josh Palmer | June 21, 2021

How well do asset owners and managers understand the critical linkage between ESG and bond performance?

At Willis Towers Watson, we believe integrating environmental, social and governance (ESG) factors into the investment process will lead to better long-term outcomes, and as such, asset owners need to assess the merits of the managers they invest with. We spend a significant amount of time assessing asset managers’ integration of ESG risks, their engagement with issuers and their stewardship capabilities; however, the ESG integration framework for fixed income has historically been opaque, either overly reliant on an equity model or not specific enough on what ESG metrics are relevant for bonds. This is evolving as more market participants begin to recognize the linkages between ESG and financial outcomes, data have become more prevalent and transparency at the underlying issuer level has improved. Fixed-income asset managers have a huge role to play — whether that be accelerating the understanding and measurement of ESG risks, increasing engagement with bond issuers on stronger terms and ESG disclosures, or finding new sustainable opportunities. The diversity of the asset class — spanning corporate bonds, sovereign bonds, securitized credit and private debt — requires nuances in the approach to ESG. Here, we offer asset owners a deeper dive on ESG integration across each of these areas, best-in-class practices we have observed and a framework to begin to assess the quality of a manager’s ESG integration. We have previously offered insights on fixed-income stewardship and plan to produce a follow-up piece on engagement.

The fixed-income ESG market continues to grow globally, and asset owners are increasing exposure.


Chart depicting allocation of $1Trillion in cumulative green bond insurance as of Q1 2021.

By type: 41% corporate, 28% Government/sponsored entity, 16% development bank and 15% Other

By region: 43% Europe, 28% Asia Pacific, 24% North America and 11% Asia

$1 trillion in cumulative green bond issuance (Q1 2021)
chart depicting percentage of asset owners integrating sustainability in 2017.
In 2017, 70% of asset owners integrated sustainability compared to 80% in 2018
% Asset owners integrating sustainability

Disclaimer

This document was prepared for general information purposes only and does not take into consideration individual circumstances. The information contained herein should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Towers Watson Investment Services, Inc., and its parent, affiliates, and their respective directors, officers, and employees (“Willis Towers Watson”) to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical. As such, this document should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice. Willis Towers Watson does not intend for anything in this document to constitute “investment advice” within the meaning of 29 C.F.R. § 2510.3-21 to any employee benefit plan subject to the Employee Retirement Income Security Act and/or section 4975 of the Internal Revenue Code.

This document is based on information available to Willis Towers Watson at the date of issue, and takes no account of subsequent developments. In addition, past performance is not indicative of future results. In producing this document Willis Towers Watson has relied upon the accuracy and completeness of certain data and information obtained from third parties. This document may not be reproduced or distributed to any other party, whether in whole or in part, without Willis Towers Watson’s prior written permission, except as may be required by law.

Views expressed by other Willis Towers Watson consultants or affiliates may differ from the information presented herein. Actual recommendations, investments or investment decisions made by Willis Towers Watson, whether for its own account or on behalf of others, may differ from those expressed herein.

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Head of Fixed Income ESG Research

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