Barclays Research published a paper in mid-November that presented the findings of its research regarding the integration of environmental, social and governance (ESG) factors into corporate bond portfolios spanning a time frame of over eight years (January 2007 through September 2015). Their research evaluated the performance of holdings screened using ESG data provided by MSCI ESG Research on U.S. companies. The authors identified a correlation between high ESG scores and credit rating, but indicated that there is likely no direct causal relationship between the ESG rating and the credit rating, stating, “Companies with stronger balance sheets might have a better ability and willingness to improve and maintain high ESG standards than their peers with lower credit ratings.” Credit quality exclusions, as could be intuitively expected, have a bigger impact on an index’s total market capitalization than ESG/SRI criteria, but the combination of the two can quickly narrow the investable set of issuers. In the authors’ example portfolios, the combination almost halved the market cap of the index. Their final analysis determined that bonds issued by corporations with high composite ESG ratings, all else being equal, have slightly lower credit spreads. The authors stated, “In our empirical analysis of the spread and performance associated with MSCI ESG ratings, we find that ESG investing has not translated into a loss of return. On the contrary, we find evidence that a high ESG rating has been a source of modest incremental return in corporate bond portfolios.” The authors went on to assert that this performance gain would likely be retained, as it did not arise from buying pressure in the market, but rather seemed to be driven by the ESG criteria underlying the MSCI ESG ratings.