It is often said that fixed income is the hardest part of an ESG portfolio to construct due to the dearth of ethical bond funds.
And it is certainly true that ESG allocators have fewer toys to play with in this sector.
Looking just at the DFMs we cover, there are 32 different strategic bond funds held in our non-ESG database but there are just four in our ESG database.
This is a particularly extreme example but the theme is similar across the board (for example there are 40 different corporate bond funds held in our non-ESG database and just 17 in our ESG one).
This does not mean ESG allocators are proving shy about investing in fixed income however.
Indeed ESG portfolios currently have, on average, a higher fixed income exposure than non-ESG portfolios.
As illustrated in the graph below, ESG portfolios have an average exposure of 31 per cent to fixed income while non-ESG portfolios have an average exposure of 29 per cent (our readers will be unsurprised to see that income portfolios outstrip both of these at 35 per cent, but that is to be expected).
So which sectors are driving this enthusiasm for bonds among ESG allocators?
The answer is: investment grade corporate bonds. ESG allocators have an average exposure of more than 12 per cent here while non-ESG allocators have an exposure of 9.6 per cent.
The ESG exposure to investment-grade corporate bonds is even slightly higher than the exposure to these assets in income portfolios.
As far as ESG portfolios are concerned, this is a sector which is dominated by two funds: Rathbone Ethical Bond and CT UK Social Bond.
As we have mentioned before, Rathbone Ethical Bond is so popular that it has a significant presence among allocators of non-ESG funds.
In most other fixed income sectors, average exposures in ESG portfolios are about the same or slightly lower than in non-ESG portfolios.
There can of course be difficulties in finding fixed income opportunities in some sectors which fit the bill for an ESG portfolio - notably government bonds.
But it feels like there remains untapped potential here.
