A familiar cliché holds that that “you can only manage what you can measure”, and fixed income managers have long based investment decisions on quantitative measurements of risk factors. Chief among these are the so-called five c’s of credit—character, capacity, capital, collateral and conditions. But while these factors, combined with balance sheet and cash flow analysis, provide valuable insight into potential downside risks, they give an incomplete picture of an issuer's environmental, social and governance (ESG) risk exposure.
Fortunately, the increasing interest in investment strategies that consider ESG factors is being met with increasing disclosure by corporate bond issuers about their exposures, goals and policies relating to those sources of potential risk. The Governance and Accountability Institute reports that 81% of S&P 500 companies published a corporate sustainability report in 2015, up from fewer than 20% in 2011. Meanwhile, organizations including Ceres, the Sustainability Accounting Standards Board and the Carbon Disclosure Project are encouraging companies to increase disclosure and are advocating for the standardization of the information that is disclosed. Also helping to increase the amount and quality of ESG-related information are data aggregators and rating services such as MSCI, Sustainalytics and Oekom who cover an increasingly vast universe of issuers.