ESG Screening in the Fixed-Income Universe

Vol. 20, No. 4, 2022
by Fabio Alessandrini, David Baptista Balula and Eric Jondeau

This paper evaluates the impact of a screening process based on Environmental, Social, and Governance (ESG) scores for an otherwise passive portfolio of investment-grade corporate bonds. The main result is that a global exclusion strategy leads to a substantial improvement of the targeted ESG score without reducing the risk-adjusted performance but with significant biases in regional, sectoral, and risk factor exposures. We demonstrate that a best-in-class strategy implemented at the regional and sectoral levels allows investors to eliminate undesirable regional and sectoral exposures while delivering similar ESG scores and risk-adjusted performances.