Integrating ESG into Fixed Income Portfolios
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The Case for Integrating ESG into Fixed Income Portfolios
Andrew Clare; Aneel Keswani; Nicholas E. Motson
- City, University of London
- ?City, University of London - Bayes Business School
- ?Faculty of Finance, Cass Business School, City University, London
- ?City University London - Bayes Business School
Strategy in a nutshell
The strategy focuses on corporate bonds that have been assigned ESG ratings. Bonds are ranked from highest to lowest ESG score, and the top quintile (top 20%) is selected for investment. Each bond is equally weighted in the portfolio, which is rebalanced monthly to maintain exposure to the highest-rated ESG bonds.
Economic rationale
The strategy capitalizes on the growing demand for ESG-compliant companies and securities. Firms with strong ESG practices tend to attract more investors, resulting in higher bond prices and returns. Global awareness of sustainability, climate change, and social responsibility supports the outperformance of high-ESG bonds.
Backtest performance
Annualised return4.23%
Volatility3.93%
Sharpe ratio1.07