High ESG ratings for bonds as well as stocks mean risk reduction, says Bob Smith, president and chief investment officer of Sage Advisory, who began his career rating bonds at Moody’s. “Like on the equity side, you’re buying quality, stability, safety, the ability to withstand adversity,” says Smith.
Indeed, higher-rated ESG bonds performed better during this year’s crisis, similar to how they performed during the 2012 European sovereign debt crisis and the 2016 energy crisis, according to research by Northern Trust Asset Management.
“Anchor to windward, the ballast in your tank, all the things you hear about why ESG matters were reflected” in the performance of highly ranked ESG bonds during the crisis, Smith says. “The true virtue is that these are exceptionally good diversifiers relative to higher-beta equity portfolios” that have a lot of risk.