Compliance February 24, 2020

ESG and Fixed Income—a Natural Fit

Both quantitative and qualitative research suggest bonds issued by companies with favorable environmental, social and governance (ESG) ratings can offer downside mitigation during periods of market turbulence.
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Art by Jon Han


Investors in the U.S. are warming to the idea of using environmental, social and governance (ESG) considerations when building out their portfolios.

Research from Morningstar finds most investors, across ages and genders, have clear preferences for ESG-conscious investment products. Morningstar suggests that 72% of the United States population expresses at least a moderate interest in sustainable investing. Institutional investors, similarly, have expressed a good measure of their own cautious but significant interest in ESG topics.

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Increasingly, investors’ ESG considerations are moving beyond the equity side of the portfolio. In fact, 33% of respondents to one survey say it is important to incorporate ESG into fixed-income investing. Asked directly whether they incorporate ESG into fixed-income management, 52% of U.S. investors that already use ESG say “yes.”

ESG Considerations Offer Valuable Fixed-Income Insight

In a recent analysis on this topic, Brad Camden, director of fixed income strategy, Northern Trust Asset Management, and Manan Mehta, senior quantitative research analyst, propose that sustainable investing themes and bond portfolios “make for a good marriage because risk is a key focus for both.”

“Bonds help manage risk through lower correlation and volatility versus equities,” the pair writes in “Sustainable Investing in Fixed Income: Avoiding the Pitfalls.” “Sustainable investing aims to mitigate damage from climate change, poor labor relations and fraudulent accounting practices, among other sources.”

Camden and Mehta present evidence suggesting that bonds issued by companies with favorable ESG governance ratings tend to trade at tighter credit spreads and have longer durations.

“We find that bonds with higher ESG ratings offered downside mitigation during periods of market turbulence despite their loose relationship to traditional credit ratings,” Camden and Mehta write. “This suggests that investing in companies with the highest ESG ratings may offer further downside mitigation above and beyond what their credit ratings would suggest. In other words, ESG considerations may provide an alternative long-term lens to evaluate credit.”

Like others writing and speaking on the topic, the pair emphasizes the importance of doing proper due diligence while investigating any new investment strategy. They say all bond investors who explore the world of sustainable investing should do their homework and have a strong understanding of ESG factors and the drivers of long-run bond returns before any taking any significant actions. Simply investing in top-rated ESG companies or applying a standard screen of some industries could be “fraught with unintended yield, duration, sector and country risks.”

“Uncertainty remains around the timing, nature and magnitude of ESG risks,” they explain. “While keeping ESG in mind, investors should still focus on the primary drivers of fixed-income returns, such as key rate duration, sector, issuer and option adjusted spread.”

Camden and Mehta observe that European companies tend to be ESG leaders, while U.S. companies are often laggards. They also warn that it is extremely difficult at this stage to model implications of climate change on asset prices.

“Increasingly, asset owners are lowering exposure to both fossil fuel reserves and carbon emissions as the first line of defense against the transition risk associated with climate change,” they write. “In doing so, investors should not only focus on historical measures of carbon footprint. They should also favor companies that are taking steps to mitigate low carbon transition risks through renewable energy and clean technology—in addition to other forward-looking measures.”

A Growing Consensus

Northern Trust’s take is far from unique. PIMCO, for example, has published a white paper reaching similar conclusions, titled “ESG Investing and Fixed Income: The Next New Normal?”

Gavin Power, PIMCO’s chief of sustainable development and international affairs, says the institutional and retail investing marketplace is witnessing a growing recognition that ESG issues present material credit risk, with respect to both corporate and sovereign debt. He adds that PIMCO’s integration of ESG credit analysis across the entire investment universe “reflects the understanding that investors, like any lender, cannot ignore sustainability and governance issues that may affect a borrower’s ability to repay its debt.”

According to PIMCO’s analysis, the materiality of ESG issues in relation to credit risk “follows naturally from the growing body of evidence demonstrating, for example, that companies that effectively manage and integrate sustainability issues realize a range of competitive benefits, including resource and cost efficiencies, productivity gains, new revenue and product opportunities, and reputation benefits.”

PIMCO further finds that, on both the product innovation and sourcing side, fixed-income ESG is accelerating.

“Numerous ESG bond funds have been launched—or are in the works—by both mainstream institutions and boutique houses,” Power observes. “Meanwhile, PIMCO engagement and discussions with both corporates and sovereigns suggest we are on the cusp of a sea change in social bond securities related to issues such as water access, sanitation, gender, health and other social-related infrastructure areas (e.g., food distribution, transport).”

Client Service February 21, 2020

Advisers Giving Back: The CAPTRUST Community Foundation

Though its giving efforts are expansive, the CAPTRUST Community Foundation’s vision is singular: 'Plain and simple, we want to enrich the lives of all children.'
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Art by Suharu Ogawa


Over the course of the past year, PLANADVISER’s Advisers Giving Back profile series has featured a wide variety of advisory firms engaged in many types of charitable and philanthropic activities.

Some of the firms, given their smaller footprints, are engaged in locally focused activities, for example teaching girls and young women in New York City about business and personal finance. Others, given their national presence, provide financial and volunteer support for many causes across the United States.

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As part of one of the largest retirement plan focused advisory firms in the U.S., the CAPTRUST Community Foundation (CCF) falls in the latter camp.

“Plain and simple, we want to enrich the lives of all children,” says Tiffany Larew, employee relations manager and the 2020 president of the CCF board of directors.

Over the 13 years it’s been in existence, the CCF has given away over a million dollars with that goal in mind. In some cases, it gives small grants directly to vetted charities, and in others, it provides larger grants and partners with charities to help them achieve “more than just money would provide.” Some recent recipients of support (both volunteer hours and monetary donations) include the Boys & Girls Club of Santa Barbara, TeamSmile, Kidznotes and the CORRAL Riding Academy.

Noble Purpose, Sophisticated Operation

Larew is acting as the organization’s board president in 2020 after having served on the CCF finance committee and as board treasurer. In taking on the role, she has worked closely with Devyn Duex, the 2019 CCF board president and an adviser in the firm’s Santa Barbara, California, office.

As Larew and Duex explain, the CAPTRUST Community Foundation has been so successful first and foremost because of enthusiastic support coming from the executive leadership, as well as from the firm’s advisers and support staff. But the CCF also continues to benefit from the efforts of its present and previous board leaders, who have made significant progress in institutionalizing and scaling the firm’s charitable efforts.

In its current form, the CCF is managed by its board of directors and five subcommittees, and its fundraising is conducted primarily through employee payroll deductions. Community fundraising also plays a part.

“It’s very gratifying to be able to give back to our communities at a regional and national level,” Larew says. “We have board members in Texas, Iowa, Ohio and other places—and we’re all working together towards the mission of helping children in our communities. It’s so important to the culture of our company. In early 2020, we already have done several projects. One was a ‘Fun Run’ event that raised $33,000 so far. Those are the sorts of events that build employee loyalty and a sense of community.”

To foster employee participation beyond the payroll deduction donations, CAPTRUST grants employees 16 hours of volunteer time as a voluntary benefit. A lot of people choose to use this time for CCF-sponsored events, but they can also spend their time supporting outside events.  

Duex recalls that one primary goal in 2019 for the CCF board was to work on several “operational sustainability and efficiency projects.”

“As the foundation continues to grow, including several new initiatives we have set to launch in 2020, our focus sharpened to ensure the foundation is set up structurally to handle the increased workflows,” Duex explains. “One of the areas [where] we saw opportunity was within accounting and finance, as well as in the grants processes. We also hired a bookkeeper to tackle day-to-day tasks and shifted oversight to the chair/treasurer, strengthening the ability for the foundation to ensure we meet our fiscal responsibilities.”

In addition to the partnership, crisis and small grants given out by the CCF, 2020 will see the launch of a new “project grant” program. Ideas for charities to support with these grants and associated staff volunteer hours will primarily be sourced from internal proposals. CAPTRUST employees will be able to file applications explaining their proposed project, how many CAPTRUST volunteers are needed, the requested grant amount, etc.

“In 2020, we are also launching an online grants portal to increase efficiency for applicants and reviewers while increasing the operational functionality through automated workflow processes, reporting, data review and archiving,” Duex says.

Duex and Larew note that every CAPTRUST Community Foundation representative or board member is a volunteer. As a 501(c)(3) entity, the foundation must comply with numerous regulatory requirements—including submitting annual reports to federal and state agencies for compliance. And when it approves a grant, each organization’s request goes through a vetting process beforehand to ensure that the organization is in good standing and that the CCF feels confident the money will directly impact children as much as possible.

Supporting Young Hearts and Minds

Larew says her experience working with the CCF has been personally enriching, adding that many of her colleagues feel the same way. She echoes the comments made by other advisory firms engaged in charitable and philanthropic work, suggesting these efforts generate great employee loyalty along with good will from local communities.

“Working with Kidznotes in 2018 was really interesting and rewarding,” Larew recalls. “They are a local music education group here in Durham, North Carolina, focusing on bringing music education to kids who would not otherwise get that opportunity. We have donated instruments and funds, and the kids have come here and played concerts as part of our year-end celebration. It was so special to see their talent and to be a part of that. In fact, one of the kids from our community went on to be a contestant on ‘America’s Got Talent.’”

Larew also points to the partnership with CORRAL Riding Academy as personally fulfilling for herself and other CAPTRUST staffers.

“The Riding Academy provides equine therapy for girls in need,” she explains. “In working with the academy, we got to do a team building lesson out there, and we actually learned a lot ourselves, as adults, about what the girls being helped there have gone through. It was an incredible opportunity to be able to experience that.”

Another experience that comes to mind for Larew is working with the Boys & Girls Club of Santa Barbara, California, following the recent fires and mudslides.

“Some of the Santa Barbara community is very affluent, but other areas are facing real economic hardship,” she explains. “Less affluent places really suffered from the flooding and mudslides that happened in the region. Our support for this organization allowed kids to go to summer camps when they didn’t have anywhere else to go.”

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