Sustainable Alpha in Sovereign and Corporate Bonds

Vol. 20, No. 2, 2022
by Karishma Kaul, Katharina Schwaiger, Muling Si and Andrew Ang

We construct fixed income portfolios for sovereign bonds and corporate bonds with sustainable insights. The climate methodology for sovereign bonds can be applied as an overlay on any benchmark and tilts toward sovereigns more prepared with the climate transition and away from those which are less prepared. The tilts reduce sovereign carbon emissions in line with the Paris Agreement. For corporate bonds, we investigate three sustainable signals that predict excess returns: environmental, social, and governance (ESG) scores of corporations scored across various rating and sector buckets, firm carbon emission intensities, and corporate commitments that signal reduced carbon emissions.