ESG investing started as an equity specialism and much of the data and analysis used today is still centred in equities. Some investment firms use these tools and ‘read across’ from equities to credit. While their claims about multi-asset sustainable investing appear reasonable at a high level, they quickly unwind for two reasons.
First, only around 40% of the bonds in the sterling credit index have a public equity profile. Not only does a focus on companies with a public equity listing greatly reduce the opportunity set, it is also the very area of the market where information dissemination is already most efficient.
Secondly, while there are clearly similarities, equities are fundamentally different from credit. What works for one isn’t always relevant or important for the other. For example, bondholders have no ownership of a companyand therefore direct influence can be limited, particularly for larger-cap companies.