While interest for environmental, social and governance investment strategies in the U.S. is only just beginning to pick up steam, the ESG theme could become a go-to strategy for many investors, especially those seeking fixed-income exposure.
Chris Bowie, a partner and portfolio manager at TwentyFour Asset Management, a $23 billion fixed income boutique of Vontobel Asset Management, argued that while more fixed-income investors in Europe demand their investments are screened for ESG factors than in the U.S., the trend could reverse with interest in the U.S. surpassing that of Europe in the next few years, Karen Demasters reports for Financial Advisor.
“Europe is leading the way for ESG (environmental, social and governance) corporate bond investing now, but just in the last six months we have seen more conversations around ESG from investors and advisors in the United States than in the past,” Bowie said.
Bowie explained that underlying supportive factors that exist in some European countries, but not in the United States, are helping to advanced the interest in ESG investing. For instance, pension plans in the U.K. have to report whether they take ESG factors into consideration.
“Once global fixed-income investors become more comfortable with the fact that they can obtain equal returns for ESG investing as with traditional investing, the interest in the United States will grow,” Bowie said.
Bowie also highlighted two problems with ESG investing that has impeded growth of the strategy, pointing to an ambiguous appellation that could mean different things to different people and to little coordination between the third-party rating systems. ESG rating systems exist for almost all equities, but not only about 60% of all fixed-income investing.
“At TwentyFour we integrate ESG considerations into all of our investments, instead of having a separate ESG team. If an investment manager is not considering ESG factors for all investments, he or she is not considering all of the risks,” Bowie explained.
“Due diligence is absolutely crucial” for advisors and investors, he added. “There is little independent verification for how well corporations” employ ESG standards and what they mean by those standards. “Investors have to be careful what they buy.”
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