ESG factors are becoming more prevalent in the fixed income space according to the latest The Cerulli Edge – Europe Edition report published by the consultant.
Demand for fixed income investments that can meet investor objectives on, for example, sustainability, are increasing, and this is set to lead to further launches of ESG products to meet this demand, accroding to André Schnurrenberger, Cerulli’s managing director, Europe.
“Cerulli research shows an increase in demand for ESG in all segments of the fixed-income market. We expect to see the launch of a variety of new ESG products over the coming years, including in areas less suited to ESG, such as high yield,” he says.
Net new flows to fixed income ESG products have passed €10bn per annum in the past two years; this is still less than half that seen in equity funds, but growing. A key challenge to further integration of ESG into fixed income assets under management includes the shortage of sustainability indices against which to benchmark performance, scarcity of ESG focused products, and challenges around issuance, particularly involving sovereign issuers, Cerulli notes.
Fixed income investors are looking to manage downside default risk, rather than prioritise upside appreciation – a key difference in developing suitable ESG products.
Ilonka Oudenampsen, senior analyst, European institutional research at Cerulli, said: “The inclusion of ESG factors in fixed income is becoming more widespread, with ESG data and ratings now available for most investment-grade credit issuers, as well as a large proportion of high-yield issuers. In addition, there have been several important innovations in the fixed-income space, including the rise of green bonds and the emergence of social bonds and bonds linked to the UN’s Sustainable Development Goals.”
Cerulli estimates that less then 0.1% of the global bond market is labelled ESG as such. Social bonds and bonds linked to the UN SDGs are still new to the market. However, more such instruments are set to be launched as demand grows, including green bonds. Given the situation in which ESG integration into fixed income is so new, managers need to spend time understanding their clients’ views on ESG in order to devise the most suitable solutions, Oudenampsen adds.
To read the full report click here: The Cerulli Edge—Europe Edition, 4Q 2018 issue.