JP Morgan Asset Management has become the latest fund group to publish research charting the positive impact that an ESG overlay can have to investment outcomes on corporate bonds.
It follows similar studies by Hermes Investment Management and BlueBay Asset Management released earlier this year.
JP Morgan’s research found that an ESG overlay could improve corporate bond portfolios by reducing portfolio volatility and, in some cases, marginally increasing risk-adjusted returns.
The research back-tested portfolios of investment grade, high yield and emerging market corporate
bonds, against their benchmarks to a portfolio constructed with an ESG overlay.
The portfolio constructed with an ESG overlay produced returns of 1.14% for the US Dollar global investment grade bonds and 0.99% for the Euro global investment grade bonds. This compared to lower returns for the standard market index equivalents of 1.07% and 0.86% respectively.
However, while an ESG overlay improved portfolio returns for all categories of corporate bonds, only investment grade returns showed improvement after transaction costs were accounted for.
The research also found credit agencies do not necessarily factor the ESG-related liabilities into their assigned ratings, therefore ESG scores can be additive to traditional credit ratings.
“Constructing a corporate bond portfolio with higher ESG scores clearly results in alpha opportunities,” said Lovjit Thukral, vice president of quantitative research, global fixed income, currency & commodities at JP Morgan Asset Management.
“Utilising an ESG overlay produces smoother returns over time, helps to immunise against volatility and in some cases marginally increases risk-adjusted returns,” he added.
