Social responsibility is the most popular factor motivating fixed income investors to integrate environmental, social and governance (ESG) considerations, according to a survey by Invesco.

Investors interviewed for the asset manager’s third annual global fixed income study were given a range of motivating factors to choose from, with 75% picking social responsibility, 67% ‘stakeholder wishes’, and 60% saying they were motivated by a desire to align with beneficiary beliefs.

Half of investors that have incorporated ESG factors within their fixed income portfolios cited return enhancement as a key driver, with Invesco highlighting this figure as a reflection of a change in investor attitudes about ESG.

“Across all regions, very few investors report that integrating ESG has hindered returns, and in the case of EMEA, a majority (52%) have said that integrating ESG has improved them,” said Nick Tolchard, head of EMEA for fixed income at Invesco.

Overall, integration of ESG considerations in fixed income had “rocketed”, said Invesco, with 80% of surveyed EMEA investors reporting this practice and 69% of APAC, up from 51% and 38% the year before.

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Motivations for incorporating ESG factors within fixed income (% citations, ESG investors)

Invesco interviewed 159 fixed income professionals for its latest study, reflecting the views of 121 institutional – defined contribution and defined benefit pension funds, insurers and sovereign wealth funds – and 38 wholesale investors managing over $20trn (€18.2bn) in assets as at the end of December 2019.

“What really interested us was just the rate of change in allocations to different asset classes or themes,” Tolchard told IPE. “One of the things we picked up was this shift to emerging markets, with allocations to emerging market debt (EMD) increasingly really dramatically over 12 months and within that the allocation to China going up as well.”

The study found that 72% of the interviewees had an allocation to EMD, up from 60% in the previous study and 49% two years earlier.

Of those invested in EMD, the average allocation was much higher in APAC (7.2%) and EMEA (6.5%) than in North America (3.6%).

Invesco reported that specialisation was on the rise, in particular among investors attracted by returns rather than diversification, who prefer country-specific allocations.

In total, 63% of respondents said they preferred country-specific allocations, with broad EM investors more frequent in North America than in the other regions.

China changes

In EMEA, investors exposed to China had an average allocation of 1.8%, expected to grow to 2.7% in three years’ time, according to the survey. Their average allocation three years ago was 1.1%.

Invesco said the approach to investing in China seemed to be changing, with 44% of respondents in this year’s study expressing a preference for onshore over offshore exposure.

Of those favouring onshore 81% did so due to enhanced access, 56% due to their being a broader range of issuers, and 44% on account of enhanced yields.

Nick Tolchard, Invesco

Nick Tolchard, head of EMEA, Invesco Fixed Income

Invesco said the survey showed fixed income investors were becoming increasingly risk averse before the market turmoil the coronavirus outbreak unleashed in the first quarter of 2020.

Two in five (43%) respondents thought the economic cycle would be ending within a year, although most anticipated a soft landing, according to the survey.

“The perception that spreads were tightening drove many investors to cautious positions,” said Tolchard. ”Given what COVID-19 has done to the market, those investors may be relieved.

“However, not all investors were so cautious, meaning some are having to manage significant volatility in what would traditionally be seen as high-quality assets, such as consumer goods, oil & gas, and travel.”

The full Invesco report can be accessed here.

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