Systematic Fixed Income

CHAPTER 10Sustainability

OVERVIEW

How can I write about investing in 2022 and not discuss sustainability? This chapter discusses the measurement of sustainability for the fixed income asset class, with a primary focus on credit‐sensitive assets. Systematic investment approaches are naturally suited to the joint challenge of fulfilling the fiduciary obligation to deliver attractive risk‐adjusted returns and simultaneously deliver on sustainability objectives. Although the direct investor relevance of measures of sustainability is modest (i.e., measures of sustainability only exhibit weak correlations with measures of credit‐excess returns or risk), a systematic investment approach can deliver economically meaningful improvements in sustainability without sacrificing risk‐adjusted returns. The reader should note that this chapter is an introduction to sustainable fixed income investing. Sustainable investing can be a book, and course, unto itself.

10.1 INTEREST IN ESG/SUSTAINABILITY

Interest from investors, asset owners, regulators, and the public generally on responsible/sustainable investing has increased enormously over the last decade. Because there is no clear, generally accepted definition of what qualifies as “responsible” or “sustainable” investing, it can be hard to quantify precisely what fraction of assets are managed in a responsible or sustainable manner. One could argue that an asset manager is responsible simply by attempting to generate the highest risk‐adjusted ...