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The ESG Advantage in Fixed Income Investing: An Empirical Analysis

Two decades ago, it seemed like ESG was going to be yet another fad in the CSR (corporate social responsibility) world when negative screens gave way to positive screens as the engine for socially responsible investing. How things have changed. As company efforts to address social and environmental problems through competitive mechanisms that generate profit and revenue become more sophisticated, so do the financial tools that allow investors to identify and target short and long term value creation. Welcome to the frontier of today’s ESG investing landscape where it is not just about identifying what a company should avoid or how it should operate, but it is also about identifying how a company frames its opportunities for growth

The key objective in this backtested analysis was to validate the efficacy of ESG (environmental, social, and governance) performance on CDS (credit default swap) spreads over a 10-year period, using historical time-series data. Specifically, we evaluated the annual rate of change in CDS spreads for a universe of high-yield and investment-grade companies, broken down by fractiles based on their annual ESG scores. We conducted the analysis at an aggregate level as well as segregating by, and neutralizing the impact of, credit quality and sector impacts.