How investors can use bonds to save the world — and make money

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Socially responsible investing isn't just for stocks anymore, and one Wall Street firm is trying to get clients to consider applying the same principles to corporate bonds.

The upshot, according to a study Barclays released this week, is that using benchmark guidelines under principles of ESG scoring — environment, society and governance — investors can put together an ethical portfolio that also provides returns.

"We found that the performance does not suffer and even benefits, and this doesn't come at the expense of the market becoming high priced," Lev Dynkin, managing director and head of the Quantitative Portfolio Strategy Group at Barclays Research, said in an interview. "We hope it will give encouragement to investors to build in ESG bond characteristics in portfolio construction on a permanent basis."

Using corporate behavior in ethics and environmental impact when making investment decisions is nothing new. Some $6.57 trillion — or 1 of every 6 dollars under professional management in the United States — is committed to the strategy, according to the Forum for Sustainable and Responsible Investment.

The growing awareness of and support for responsible investing has led to it becoming inherent to the investment processes of many institutional investors.
Jes Staley
CEO, Barclays

However, Barclays believes its study is the first to address the strategy in terms of the $8.4 trillion corporate bond market. Mutual funds and alternative investments, such as private equity and hedge funds, have been the main vehicles for sustainable investing, while bonds have been an underutilized tool, Barclays said.

The report breaks down categories of corporate bonds by the characteristics and found a "small but positive" return for companies with high ESG scores above those with low scores. The results were especially strong for companies with strong governance scores, according to the study that looked at returns since 2009. Strong governance companies outperformed their low-ESG peers by 0.82 percent in companies indexed by MSCI, an analytics and indexing firm that serves asset managers.

"The growing awareness of and support for responsible investing has led to it becoming inherent to the investment processes of many institutional investors," Barclays CEO Jes Staley said in a statement.

Investors looking to find bond opportunities in the socially responsible realm can check out which companies measure up through indexes.

The Bloomberg Barclays MSCI Socially Responsible indexes identify which companies don't have high ESG ratings, such as tobacco and nuclear companies and those that sell genetically modified organisms. The STOXX Global ESG Leaders index showcases companies with high marks.

Though Barclays reported the bond results for high ESG companies have been more positive over time, those in the STOXX index have faltered over the past year, posting a 4.3 percent decline, according to indicators provided by Sustainalytics.