The perception of sustainable investing has taken a hit. Since 2022, sustainable European equities have experienced underperformance against their broad markets1. Even as this performance begins to see glimmers of improvement, the reputation of sustainable indices and ESG screening is tarnished. However, we believe, there are still asset classes that offer more consistent sustainable outcomes.
Why has the enthusiasm for sustainable investing lost its lustre? A lag in performance of sustainable European equities relative to the broader European equity markets over the last three years hasn’t helped.[1] Sector rotation in equities is often blamed for this downturn in returns.
That old news that the so-called ‘greenium’ has disappeared has an arithmetical corollary: if credit spreads are the same for the sustainable bond subset as for the broad index, then performance should track, too.
Credit bond performance is much less subject to industry categories than equity performance. Indeed, the ‘rule of thumb‘ is that 50% to 75% of investment grade performance is determined by sovereign rates.[2]
And the second-largest performance driver of corporate bonds? Credit spreads. Industry categorisation has a much smaller effect in credit than in equities. Want the figures? That’s in our article, too.
In this paper in our credit series, we share our quantitative research on sustainable credit. Not an engineer? Don’t worry, our text is straightforward and our more complex stats appear in brief appendices.
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Credit can feel calm because returns are steady most of the time. But credit is asymmetric: the upside is limited to the coupon, while the downside can be permanent if fundamentals weaken or liquidity disappears.
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