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December 15, 2021 | GSAM Connect

When Sustainability Has Significance

As ESG adoption continues to accelerate in 2021, institutional investors may be considering how to incorporate ESG factors into their fixed income portfolios. We sat down with Niamh Whooley, Global Head of ESG Research for Fixed Income, Emma Cohen, our ESG and Impact Research Specialist and Sophia Ferguson, Fixed Income Client Portfolio Manager to hear about the latest trends in ESG fixed income.

Niamh, given the absence of a format such a proxy voting in equities, can you outline your approach to stewardship and the role engagement can play in fixed income?

Bondholder engagement is a key area of innovation for us, and we have an important voice in terms of engagement to drive good ESG outcomes. We look at this from two lenses: the engagement is driven by credit analysts as a way to evidence their ESG rating. They engage with issuers on key topics to better understand them and how they act as an input to their rating.  But we also engage extensively to drive positive outcomes. Whether it be on topics ranging from climate change to human rights, we aim to drive disclosure in the market so as investors, we can better understand the issue and help drive improvement. When we started engaging with issuers on a systematic basis back in 2017, we were often told we were the first bondholder to be enquiring on a topic. I don’t believe that is the case now which is an encouraging sign in terms of the industry focus on increasing disclosure and driving positive outcomes.

Green and sustainable bond issuance on the sovereign side, by its very nature, must be more difficult than on the corporate side, yet recently there’s been a trend from sovereigns to issue ESG bonds. Emma, what do you think is driving this?

You’re right, what has been very interesting this year has been the growth of issuance on the sovereigns, super-nationals and agency front.  So, there's a number of drivers for this, and some examples of really interesting programs.  We have the UK Green Guilt, the first green bond program from the UK last month.  They had £100 billion in demand for £10 billion of bonds which I think really highlights the depth of that market.  Similarly, we've had the European Union announced Next Generation EU which is their first green bond program, and they're intending to issue €250 billion of debt in the next five years, so that will actually make the European Union the largest green bond issuer in the world. Social and sustainability bonds have also been really an area of growth in part driven by the COVID-19 pandemic; so as governments have needed to increase spending to support communities during the pandemic, they've chosen to fund this in part through the social bond market.

What’s clear in conversations with clients is that there’s no one size fits all approach to ESG investing. Sophia, how do you work with clients to help them in their ESG journey?

ESG investing really sits along the spectrum. We break ESG investing into three core approaches: integration, alignment, and impact.  So let's start with integration. Across all of our strategies, even those without explicit ESG names, labels, or parameters, we integrate ESG considerations into our bottom-up corporate selection and portfolio construction process.  We believe this provides us a more holistic view in terms of investment risks and opportunities.  So from that sense, it enriches our investment process.

Alignment encompasses rules-based or data-driven screening of a specific investment universe, and this is an area that's really come a long way.  Screening, historically, was applied to remove entire sectors depending on the client's objectives or needs.  So for example, a climate-focused investor could screen out all oil and gas companies, but that often results in some significant tracking error to the benchmark and some performance differential. As the data has evolved, we have become able to design portfolios with much more precision by using revenue-based screens in lieu of broad sector screens.  This has allowed us to tilt portfolios towards best in class issuers while really keeping that tracking error in line.

And finally, there’s impact investing. Impact is really making investments aimed at generating that positive and measurable social or environmental impact.  These, traditionally, have been applied to private markets, but on our public fixed income platform can also assess the impact of these green social sustainability bonds through our proprietary framework.

Given the dynamism of the field, and the pace of innovation, and growth in relevance, importance and adoption, we believe an integration: alignment: impact framework can really help us contextualize and define our client conversations so that we can design solutions to meet their ESG needs.


For more information on ESG investing in fixed income, please contact your Goldman Sachs Asset Management representative.


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About the Authors

Niamh Whooley

Niamh Whooley

Global Head of ESG Research for Fixed Income, Goldman Sachs Asset Management
Emma Cohen

Emma Cohen

ESG and Impact Research Specialist, Goldman Sachs Asset Management
Sophia Ferguson

Sophia Ferguson

Fixed Income Lead Portfolio Manager, Goldman Sachs Asset Management