Debt market investors are getting to grips with applying ESG principles to their portfolios. But is there a potential performance cost for taking an ethical bias? We look at the most popular ways of integrating ESG principles and their impacts on the investible universe.
The ESG question has shifted from ‘should’ we implement it in portfolio construction to ‘how’ do we do this.
Bondholders have two main options:
- Active ownership – using investor influence to promote positive change.
- Negative screening – excluding bonds that do not meet investors’ ESG criteria.
While active ownership is an exciting longer-term option, negative screening gives investors an immediate way to express an ESG view within their portfolios. But what impact could excluding companies from the investable universe have on a portfolio’s potential risk-adjusted return?
We dig into the four most contentious industries to examine how the investment universe is impacted by their exclusion through negative screening.
- Controversial weapons
- Fossil fuels