Fixed income investors could use an environmental, social and governance approach to add another layer of risk management and do no harm to portfolio returns, an Australian ESG bond pioneer says.
Altius Asset Management chief investment officer Bill Bovingdon, who launched Australia’s first ESG bond fund in 2014, has seen momentum in the process alongside a growing number of competitors.
The jury’s out on whether an ESG approach to fixed income boosts returns, but there has been no compromise on performance so far, he said.
“If we look at big-picture representation of what it means for returns, there’s the Barclays Credit Outlook Report from 2017, which looks back on their global bond indices and looks to remove some of the worst performing companies, from an ESG perspective,” he said. “It found there was a small improvement in performance and risk which supports the notion that the responsible investment approach pays off.”
Bovingdon spoke in a session titled “Can socially responsible fixed interest investing boost returns?” at the Investment Magazine Fixed Income and Credit Forum, held in Healesville on July 24-25.
“In our lived experience since we launched our Sustainable Bond Fund in 2014, based upon an unconstrained asset-backed portfolio running since 2011, there’s no performance differential between the two,” Bovingdon said.
Like their equity-market equivalents, ethical bond funds offered comparable returns to traditional products.
“There is no impost on taking a responsible investment approach in bonds,” Bovingdon said. “Perhaps for someone doing the research generally, investors come in with the [question] ‘What’s it going to cost me?’ It may not cost you anything.”
Altius used ESG specialist CAER’s sustainability rankings and a sustainability committee to decide on investment, divestment or engagement with poorly behaved companies.
The asset manager was mindful of the “carbon image that goes with the practices of an organisation”, social issues such as employee relations and health, and corporate governance and reputational risk in the context of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
“The impact on the institutions is becoming more and more relevant and material from a credit perspective, regulatory sanctions, brand damage, break-up of a vertical integration model,” Bovingdon said.
Commonwealth Bank “came under our radar” in 2014 with the financial planning scandal, then a 2015 Senate inquiry escalated it with fines and refunds that were being made to customers and regulators, he said.
“In 2016, we sent some letters to investor relations and the group treasurer asking for governance improvement clarifications,” he explained. “At that time, it didn’t seem a priority for CBA to look at their culture and governance and they sent us a letter that left us in the dark. We divested as a consequence.
“We then saw the CommInsure scandal and Austrac laundering scandal. We continued to engage, with a letter to the board in 2017. What we’re seeing now is a greater willingness to engage with change of management. Clearly, we would like to put them back in the portfolio if we believe they’ve addressed some of these issues.”
Most ESG risks were long term, allowing insufficient time for a definitive answer on whether the fund’s ESG screen would boost returns, but meeting those extra objectives without having to pay for it was a good thing, Bovingdon said.
Eventually, companies that rated highly on CAER’s sustainability scale could be rewarded with lower cost of capital.
“One of the challenges will be not so much at a company-wide level; a good governance is rewarded with good borrowing costs,” Bovingdon said.