Bloomberg BNA — Barclays and MSCI Inc. launched a family of fixed-income indices June 11 based primarily on environmental, social, and governance (ESG) factors, which could spur growth in sustainable investing by bond investors, the organizations said.
The set of ESG indices is the first of its kind for bonds, Barclays and MSCI said in a statement.
Cheryl Smith, executive vice president at Trillium Asset Management, told BNA the move was “very welcome,” and that it was the first set of fixed-income ESG indices of which she was aware. Barclays is the industry standard for the fixed-income industry, and MSCI conducts sustainability research, so their decision to work together is significant, she said.
“Clearly MSCI and Barclays both realize that there has been a lot of institutional investor interest in sustainable investing,” James Lee, senior fixed-income analyst at Calvert Investment Management, told BNA.
The organizations issued three sets of indices. One set, the Barclays MSCI Socially Responsible (SRI) Indices, excludes companies engaged in particular activities, such as tobacco, nuclear power, or genetically modified organisms, which investors may want to screen out.
Another set, the Barclays MSCI Sustainability Indices, will only include companies with high ESG ratings determined by MSCI relative to their competitors, which Smith called a “best in class” approach.
The third set, the Barclays MSCI ESG Weighted Indices, will not exclude any companies, but will overweight or underweight issuers within a bond index based on ESG ratings.
Used to Create Products
Institutional investors can use the indices to create investment products, such as exchange-traded funds, separately managed accounts, or structured products, based on ESG factors, the organizations said.
The creation of the indices “shows that there is a strong interest in providing investments that incorporate sustainability factors,” Erica Lasdon, senior sustainability analyst and portfolio team manager at Calvert, told BNA June 11.
Trillium has been using ESG criteria for fixed-income investments for 30 years, and compares the performance of its ESG funds to standard industry benchmarks such as the Barclays Intermediate Government/Credit Index. The new set of indices may allow Trillium to compare directly to ESG indices, Smith said.
Growth of Green Bonds
Part of the motivation for creating the indices, Smith said, may have been the increasing interest by issuers in issuing green bonds, whether related to environmental remediation, water infrastructure projects, or other topics. The World Bank, the International Finance Corp., the Korean Export-Import Bank, and the Commonwealth of Massachusetts have all issued green bonds, she said.
“There will be a growing demand for this kind of index because of the growing demand by issuers and investors of, for example, green bonds,” Smith said.
Sustainability Indices in Equity Market
Sustainability indices for equity investors have existed for several years, including the Dow Jones Sustainability Indices and the FTSE4Good indices.
Interest in ESG indices may have developed first on the equities side because equity investors generally have more leverage to engage with companies on ESG issues through shareholder engagement and other activities, Smith said. Although the fixed-income market is much larger than the equity market in terms of total assets, bonds are not traded as actively as shares, she said.
Lee agreed, saying that historically, attributing performance to ESG factors has been more common in the equity market because equity investments give investors an ownership in the company. “It's easier to take a [socially responsible investing] angle if you are an equity investor,” because an equity investor by definition is part owner, Lee said.
The new bond indices show that investor interest in ESG issues has matured and is increasing beyond the equity market, Lasdon said. “There is an increasing number of products and interest in responsible and sustainable investing, in fixed income and across other asset classes,” she said.
The indices could also shed light on how ESG factors affect corporate performance, Smith said. If you have two indices with the same duration and security structure, such as corporate bonds compared with corporate bonds, using an ESG index could “really help us understand whether the ESG part is contributing in a market environment,” she said.
The New York State Pension Fund, valued at $160 billion, declined comment.
The California Public Employees' Retirement System, the largest public pension fund in the United States with approximately $260 billion in assets, did not immediately respond to a request for comment.