How Do ESG Factors Impact Fixed Income Investing?

Hermes argues that credit ratings, as a pure measure of risk when investing in bonds, should pick up ESG scores and corresponding ESG risks

Hermes 27 April, 2017 | 11:21AM
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Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Hermes’ Mitch Reznick, co-head of credit, and Dr Michael Viehs summarise their report entitled “Pricing ESG Risk in Credit Markets”.

Over the last few years much intellectual capital has been thrown at understanding, analysing and measuring environmental, social and governance risks when investing. Even though we know that credit risk is the primary driver of credit spreads, we also know unequivocally that ESG factors impact valuations, too. Therefore, as fiduciaries, we are compelled to assess and price ESG risks, just as we do for credit risks.

The problem for us was that while there is a plethora of ways to price credit risk, we lacked models to price ESG risks. And since assessing ESG risk has been integrated into our investment process for years, after working with the Responsibility, Global Equities and Hermes EOS teams, we decided we now had the ability to create an ESG pricing model.

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Hermes  Hermes is a multi-asset fund manager offering global institutional and pension fund clients access to a broad range of specialist, high conviction investment teams.

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