Measuring ESG returns in credit

Seminar by Simon Polbennikov

25th July 2023 – In-Person and On-Line – Hybrid

The LQG is very grateful to BlackRock for hosting this seminar.

Simon Polbennikov introduces an approach to measuring the effect of ESG investing in Credit – with cool results! This time it’s different!
Simon isolates ESG from other effects by constructing ESG-tilted portfolios in $- and €-IG whose systematic risk exposures match those of a broad market index. The return difference between high and low ESG portfolios represents “clean” ESG return.
Investors often evaluate the benefits of ESG-investing in credit by comparing an ESG-constrained index to a conventional, unconstrained one. However, such comparison is subject to significant biases due to non-ESG effects, such as differences in credit quality, spread or industry sector allocation between the two indices.
He introduces a simple yet precise approach to measuring the effect of ESG investing in credit. He isolates ESG from other effects by constructing ESG-tilted portfolios in US and Euro IG whose systematic risk exposures match those of a broad market index. Portfolios with positive and negative tilts have identical risk profiles but very different ESG characteristics. The resulting return difference between high and low ESG portfolios represents “clean” ESG return.
Using MSCI ESG ratings, he illustrates that isolating ESG premium correctly can lead to drastically different conclusions when compared to relative returns of an ESG-constrained index. He shows that ESG returns premium has been positive over the past decade, both in the US and Euro IG markets.
He also finds that avoiding issuers with low ESG ratings resulted in higher returns than favouring issuers with high ESG ratings.
ESG-tilted portfolios can be updated periodically to monitor the performance effect of ESG investing at the industry or market level.

Simon Polbennikov

Managing Director
Barclays

Simon Polbennikov is a Managing Director in the Quantitative Portfolio Strategy group at Barclays. He is responsible for empirical research on systematic strategies and quantitative portfolio management in fixed income. Simon joined Barclays in October 2008 from Lehman Brothers, where he held a similar role. He studied physics at Moscow State University, Russia, and received a PhD degree in empirical finance from Tilburg University, the Netherlands.