Pax World launched the Pax Core Bond Fund (PAXBX) in 2016, joining the Pax High Yield Bond Fund as our second fixed income strategy. This investment-grade bond fund invests across multiple fixed income sectors and allocates a portion of the portfolio to impact bonds promoting positive community and environmental outcomes. In this Q&A, Portfolio Manager Tony Trzcinka shares his views on the value of fixed income ESG integration and growth in the impact bond market.
Q: How does environmental, social and governance (ESG) research integration support fixed income portfolio management?
In managing an investment-grade bond fund, a big focus is minimizing downside risk. Credit risk, or the risk that a borrower’s credit rating deteriorates, is one of the primary risks that we seek to manage, particularly within our corporate bond allocation. ESG research serves an important role alongside our financial research as we vet each issuer. We feel that by incorporating ESG considerations into credit selection we are able to identify better-managed companies that are less likely to run into credit issues.
In fact, recent research1 backs this up by showing that companies with higher ESG factors are less likely to declare bankruptcy and a separate study2 shows that bonds of companies with stronger ESG ratings perform better. We also seek to invest in corporate bonds of companies whose products, services and technologies are proactively confronting global sustainability challenges.
So ideally, we are trying to capture the risk mitigation benefits from this sustainability lens and potentially improve performance through a portfolio bias toward companies with ESG strength.
Q: What is driving growth in the green bond market?
The green bond market has experienced tremendous growth over the last few years. Issuance has gone from $42 billion in 2015 to $81 billion in 2016 to an estimated $150 billion in 2017.3 Green bonds are aimed specifically at environmental impact, focusing on climate change mitigation, energy efficiency and clean energy.
In speaking with green bond issuers, they frequently cite two drivers of the growth in the market. First, there is tremendous demand from the growing number of investors seeking more than financial return. Second, green bonds attract a diverse group of investors which helps expand the issuing company’s investor base. One treasurer actually referred to them as a “treasurer’s dream.”
Q: Can you provide examples of bonds in the Fund that help improve community and environmental outcomes?
The Fund holds a number of investments that specifically target positive impact in areas such as energy and environment, community development, and sustainable infrastructure. The Fund owns 16 different green bonds that finance environmentally beneficial projects. For example, Bank of America Green Bonds are aimed at initiatives that address climate change, reduce demands on natural resources and advance lower-carbon economic solutions.
On the community development end of the impact investment spectrum, Envest Microfinance is an example of a Fund investment that supports microfinance entrepreneurs in developing countries, such as Nicaragua, Kyrgyzstan, Peru, and Tajikistan. The organization targets the world’s economically marginalized populations by lending primarily to small microfinance institutions.
As of 12/31/16, Bank of America Green Bonds was 0.83% and Envest Microfinance was 0.02% of the Pax Core Bond Fund. Holdings are subject to change.
1Source: Equity Strategy Focus Point, Bank of America Merrill Lynch, December 18, 2016.
2Source: Sustainable Investing and Bond Returns, Barclays Research Quantitative Portfolio Strategy Group, 2016.
3Source: Climate Bonds Initiative.