Sustainable investors should think differently when it comes to fixed income | Pendal Group
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Sustainable investors should think differently when it comes to fixed income

When investing with a sustainable tilt, bonds as an asset class needs to be thought of very differently to equities, property and infrastructure. Pendal’s Michael Blayney explains

  • Bond investors have several options to get a sustainable tilt
  • Sustainable, green and impact bonds have different attributes
  • A multi-asset approach provides greatest flexibility

A MULTI-ASSET approach to building a sustainable portfolio provides many more options than a single asset class.

But it also means investors have to understand how to go green within each asset class — and the implications that decisions in one asset class impacts other asset classes.

In Australian equities, where the market is more concentrated, fundamental active management is the optimal approach.

In international equities, the main implication of a sustainable fund is lower energy exposure. To achieve that it might be necessary to invest in correlated assets in other asset classes.

Sustainable investing in property and infrastructure involves fewer exclusions than the broader equities category, but it can be harder to find dedicated sustainable products.

What about fixed income?

“When investing with a sustainable tilt, bonds as an asset class needs to be thought of very differently to equities, property and infrastructure,” says Michael Blayney, head of Pendal’s Head of Multi-Asset.

“It is less about increasing in value, and more about avoiding defaults and impairments.”

In other words, investing in bonds is about much more than returns, as the world learned during the Covid downturn.

Pendal Sustainable Australian Fixed Interest Fund

An Aussie bond fund that aims to outperform its benchmark while targeting environmental and social outcomes via a portion of its holdings.

Bond markets are not simple, partly because derivatives are often needed across products to achieve interest rate and credit exposure outcomes. That makes bonds far more complicated than buying stocks.

But understanding the complexity allows greater flexibility in creating a sustainable portfolio across asset classes.

Blayney explains that credit spreads — the difference between what a government bond and a corporate bond of the same maturity is yielding — are tighter on sustainable indices.

“That’s because by their nature, they tend to be underweight in the riskier industry sectors, particularly energy,” he says. “ESG [environmental, social and governance] characteristics tend to correlate with higher quality businesses.”

There are also green bonds, where proceeds are earmarked for projects that have a positive impact on the environment. Increasingly there are also impact bonds that target social outcomes.

Comparing the different types of bonds – aggregate, sustainable and green – shows that yield to maturity is lower for the latter two. This is partly due to the country composition, with green bond issuance dominated by Europe.

Global AggregateGlobal Aggregate SustainabilityGlobal Green Bond
RatingAA-AA-A+
Yield to maturity (%)1.050.790.53
Weighted average spread (basis points)343058
Duration (years)7.57.68.5

Source: Bloomberg. Bloomberg composite rating shown. Data as at 19 July 2021. Global Green Bond Select Index proxied with an index tracking ETF.

“There are tools — futures or interest rate swaps — that allow investors to get access to the desired yield curve without the exposure to the market where the physical capital is allocated,” Blayney says.

The weighted average spread of the securities in the Sustainability Index is lower than the standard index, partly because of the individual securities and partly because of sector differences. While the credit ratings are broadly the same, when one index is rated higher it is always the Sustainability index. All indexes are investment grade.

“In the case of impact bonds, many are issued by banks. So they can have high creditworthiness while allowing capital to be directed to meaningful projects,” Blayney says.

“There’s also a relatively newer, and quite innovative range of credit securities where the coupon paid by the borrower is linked to achievement of various non-financial objectives.”

“Ultimately investors have a range of ways to express ESG preferences or insights within the bonds component of portfolios. We believe a blend of green bonds — sovereign and non-sovereign, other impact bonds, and sustainable corporates — can represent a solid core to a portfolio,” Blayney says.

Is it worth thinking green across your portfolio?

Yes, says Blayney.

“A broad universe of securities allows investors to give effect to a variety of ESG tilts within their portfolios,” Blayney says. “Generally, we expect less tail risk and a quality bias in moving to a more sustainable portfolio.”


About Michael Blayney and Pendal’s Multi-Asset capabilities

Michael Blayney leads Pendal’s multi-asset team.

Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

The team manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.

Browse Pendal’s multi asset funds here

Find out about Pendal Sustainable Australian Fixed Interest Fund here

Contact a Pendal key account manager here


This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at August 18, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

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