Ethical Investing  

BNY Mellon looks to ethical strategies to add value to bonds

BNY Mellon looks to ethical strategies to add value to bonds

Examining a company's ethics can help bond investors understand the creditworthiness of the investment, according to an analyst at BNY Mellon's Insight Investments.

But Joshua Kendall said information about a company's ethical, social and governance (ESG) performance can be hard to come by.

He said: "When it comes to corporate bonds, default risk should be the prism through which credit analysts consider every issue. In practice, a full investment analysis is required to inform an investment decision and investors expect ESG risk scores to be one part of assigning a credit rating that indicates the relative risk of default loss.

"However, the availability of ESG-related data presents an issue for investors. Data from third-party providers is important, but not enough. For many smaller issuers, especially emerging market and high yield companies, the availability of relevant non-financial data often lags behind that available for larger issuers.

"Investors will therefore need a process to generate ESG risk scores."

He added: "Despite this challenge, investors' growing interest in responsible investment approaches to fixed income has driven innovation and development in the strategies available, and also in the market, as growth in the availability of green and other sustainable bonds demonstrates.

"No longer the preserve of equity investors, bondholders are growing to realise how a responsible approach can support their objectives – and the power they can have to influence the companies in which they invest."

The comments came during Good Money Week, which is running from September 29 to October 5 and aims to raise awareness of socially responsible and ethical investing.

Peter Monson, a portfolio manager at Nikko Asset Management agreed ESG had a role to play in helping investors understand the fundamental strength of a business.

He said: "ESG helps us build the case for sustainability of earnings, risk mitigation and identifying industries or companies undergoing positive fundamental change. ESG can, but does not always, impact equity valuations."

david.thorpe@ft.com