EMEA fixed income investors bid on ESG for superior returns

EMEA investors have the highest proportion of investments covered by ESG considerations

  
Image used for illustrative purpose. close up of man hand with digital tablet analyzing growth charts.

Image used for illustrative purpose. close up of man hand with digital tablet analyzing growth charts.

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Eighty percent of the fixed income investors in the Middle East, along with Europe and Africa, have sharply increased the adoption of ESG into their portfolio in 2019, up from 51 percent in 2018, according to a study on global fixed income investments.

The investments in environment, social and governance (ESG) also referred as sustainable investing have seen a sharp increase in the Europe, Middle East and Africa (EMEA) markets compared to other regions across the world, said the American investment management firm Invesco in its third annual Global Fixed Income study.

In the Asia-Pacific region, 69 percent of the investors incorporated ESG into their fixed-income portfolio, it said. Moreover, within these portfolios, EMEA investors have the highest proportion of investments covered by ESG considerations with 34 percent compared to 22 percent in North America and 19 percent in Asia-Pacific. North American investors have been the least enthusiastic adopters of ESG, with just 56 percent incorporating it into portfolios, the study said.

Gone are the days when investors viewed the adoption of ESG investing principles as a hindrance to investment performance. “Only three percent of our survey respondents held this view whereas half of them now consider informed assessment of issuer-related ESG risks as an important tool for investors to enhance their returns.  Some 54 percent of the respondents now believe ESG analysis can unlock hidden value within fixed income and 50 percent of investors that have incorporated ESG within their fixed income portfolios cite return enhancement as a key driver,” said Invesco study.

EMEA investors have the most positive attitude of all regions surveyed: 52 percent stated incorporating ESG into their fixed income portfolios helped returns whereas just two percent stated it was a hindrance, it said.

Bullish on ESG future

Also, EMEA investors are also most bullish about the future of ESG, with 34 percent anticipating these considerations having a ‘much greater influence’ in three years’ time. Only 15 percent of EMEA investors expected ESG to be no more influential than it is currently, the lowest proportion of all respondents, said the study.

“Many investors used to assume that integrating ESG would compromise performance, but attitudes have changed. Across all regions, very few investors report that it has hindered returns and, in the case of EMEA, a majority (52 percent) have said that integrating ESG has improved them,” said Nick Tolchard, Head of EMEA, Invesco Fixed Income.

Three-quarters (75 percent) of investors reference social responsibility as the main driver to integrating ESG factors within portfolios and 67 percent cited stakeholder wishes as a key motivator behind their decision to integrate ESG, showing just how important this issue has become to asset owners and investors, he said.

Invesco recently released findings outlining investment sentiments discerned from interviews with 159 CIOs and fixed income asset owners globally.

The study, which surveyed fixed income investors across North America, EMEA and Asia-Pacific (APAC) with a combined asset under management totaling $20 trillion by 2019-end, revealed that 72 percent of investors have an allocation to emerging market debt versus 49 percent observed in the 2018 study.

Also, the majority (51 percent) expressed concern around bond market liquidity, uncertain how bond markets would behave during more challenging periods; and almost half (43 percent) of respondents believed the end of the record-long economic cycle was a year or less away at the time of the survey.

Although the widespread use of unconventional monetary policy and low levels of inflation meant that for many the cycle was seen as hard to compare to those of previous decades, the study revealed an underlying increase in risk aversion among respondents as they anticipated the record run in fixed income markets might be coming to an end. This underlying risk aversion likely put investors in a better position to weather the unprecedented market shocks brought on by COVID-19.

Zainab Kufaishi, head of Middle East and Africa, Invesco, said: “Amongst our sovereign and larger institutional investors, we have noted the resilience of client portfolios through the crisis. Long term investment horizons and thoughtful asset allocation had created robust and well diversified portfolios, meaning that even with the volatility witnessed this year, some investors have been able to take advantage of key opportunities in the fixed income markets.”

(Writing by Atique Naqvi, editing by Seban Scaria)

seban.scaria@refinitiv.com

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