ESG Investing and Fixed Income: The Next New Normal?

A quiet but profound pivot is underway in the sustainable investing space – a pivot that, in our view, will reshape markets and elevate fixed income to a place of prominence within the environmental, social and governance (ESG) field.

When the United Nations Global Compact launched its concept of ESG investing in 2004, the focus was decidedly on the action and tactics that international investors (especially asset management firms) could undertake as equity owners to influence the behavior of corporations in relation to sustainability issues.

This critical framing, with a related emphasis on the financial materiality of a range of ESG issues, delivered its intended consequence – moving sustainable investing beyond purely norms-based ethical approaches (i.e., negative screening and potentially sacrificing returns) and toward mainstream understanding and adoption.

To date, however, equities have received the lion’s share of attention and engagement from investors. The reasons, when comparing equities with other assets, include a much larger body of ESG research, numerous benchmarks and indexes, and clearer connections to corporate engagement.

We believe this is about to change, ushering in a possible “ESG New Normal” with fixed income at the core of the sustainable investing universe that could eventually expand ESG-related borrowing from billions of dollars annually to the trillions needed to safeguard a country or company’s creditworthiness over the long term.

So, what are the “straws in the wind” that lead us to this conclusion?