It is often said that investor demand drove the development of environmental, social, and governance (ESG) and impact investing. While that is true to some extent, it may be more accurate to attribute ESG and impact investing’s ascendance to the evolution of data.
The availability of high-quality comparable data that covers a multi-year time series is a critical input for evaluating investment opportunities through an ESG and impact framework. While reliable data sets exist today on the equity side, particularly for large-cap, developed market companies, the fixed income data set is still emerging. For this reason, analyzing fixed income issues—particularly municipal, sovereign, and agency debt—on their ESG and impact merits requires the construction of a proprietary, pragmatic framework that can compare issues and issuers using the data currently available.
The Evolution of ESG and Impact Data
Most of the growth of ESG and impact reporting to date has come from public and private companies. In the late twentieth century, a professional ecosystem of financial and extra-financial data aggregators began to collect data on publicly traded companies, supplement it with direct research, and provide it to investor groups seeking to integrate ESG factors into their research process. The development of ESG reporting standards and pressure from stakeholders also encouraged companies to provide greater access to their data. As a result, a reliable ESG data set has emerged that can be used to evaluate equities and corporate bonds.
Compared with public companies, the state of ESG and impact data in the municipal, sovereign, and agency space has lagged, and more closely resembles where public companies were in the early 2000s, before standard disclosures were widespread. What data is available today for these entities lacks consistency. As a result, evaluating the ESG and impact characteristics of municipalities, sovereigns, and agencies requires a different and more effortful approach.
Evaluating Issuers for Impact Relative to Their Peers
Fixed income investment managers have adopted different approaches for evaluating issuers’ ESG and impact characteristics. At SNW, we assess the impact characteristics of issuers within the context of their peers.
At a high level, our approach groups issuers that have already passed a rigorous credit-screening process according to their purpose, inclusive of ESG and impact elements, and then evaluates each issuer for impact relative to its peer group. Rather than divide issuers into sectors based on how their bonds are issued or backed, e.g., taxable versus tax exempt or general obligation versus utility debt, we categorize them based on theory of impact. Categories include cities, agencies, school systems, utilities, and transportation, among others.
For each issuer category, we have assembled a data set based on what is regularly made available for a large percentage of issuers. We then score issuers on relevant ESG and impact characteristics relative to their peers. At the conclusion of our review, only the issuers that score in the top two quintiles for their category are eligible for inclusion in our impact portfolios.
We also examine how issuers will use bond proceeds. For example, a renewable energy project that is being financed through a dedicated bond issue would be evaluated differently than a bond intended to finance a sporting arena.
Strengthening the ESG and Impact Investment Case in Fixed Income
Fixed income investors are seeking more clarity and transparency about ESG and impact factors related to issuers of debt and the projects being financed. Consistent disclosure of these metrics over time by issuers will strengthen the case for further integrating these factors into investment analysis. For now, managers that take a thoughtful, critical, and consistent approach to evaluating the available data, while being pragmatic and realistic about the challenges involved, may be best positioned to work with ESG and impact investors to achieve their goals.
See our white paper, Viewing ESG and Impact Fixed Income Investing Through a Data Lens, for more on the evolution of ESG and impact data and how we evaluate these characteristics in our strategies.