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Two become one

Combining corporate credit with ESG criteria
18 May 2021
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    Two become one

    It has been a fascinating few years for the asset management industry as it seeks to rapidly adopt and embed ESG principles. The industry is quickly transitioning towards complete, top to bottom, integration of ESG criteria. Equities as an asset class is ahead of its fixed income counterpart with a broader range of ESG offerings, but the fixed income landscape is catching up fast with a range of creative ESG offerings appearing over the past few years.

    Choosing a sustainable fixed income benchmark may seem like a trivial exercise, but the reality is there are notable differences between benchmarks in terms of risk characteristics and profile depending on whether exclusions or tilts (or both) are used to improve the overall ESG profile of the index.

    In this note, we look at the various methods for improving the ESG metrics of an investment grade corporate bond benchmark index and what they imply in terms of the characteristic features of the index. In particular, we investigate the impact of the various exclusions and tilts used to construct the three popular classes of ESG corporate credit indices: SRI, Sustainability (negative screening) and ESG-Weighted and how they differ in terms of credit risk, sector and duration profiles relative to a common parent index . We focus on US investment grade corporate credit indices for the purposes of this investigative analysis and note that MSCI ESG ratings and scores are used.