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Sustainable Systematic Credit

Peter Diep, Lukasz Pomorski and Scott Richardson
The Journal of Fixed Income Summer 2022, jfi.2022.1.136; DOI: https://doi.org/10.3905/jfi.2022.1.136
Peter Diep
is an executive director at AQR Capital Management, LLC
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Lukasz Pomorski
is a managing director and Head of ESG Research at AQR Capital Management, LLC
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Scott Richardson
is a principal at AQR Capital Management, LLC, and a Professor at London Business School
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Abstract

Interest in sustainable investing has exploded in recent years, initially focused on public equity markets, but now evolving into fixed income. We assess various aspects of sustainable investing for developed market corporate bond markets (both Investment Grade and High Yield). Using a representative set of sustainability measures spanning environment, societal, and governance (ESG) constructs we find: 1) credit spreads are only marginally associated with ESG measures; 2) ESG measures are only marginally associated with standard return forecasting measures for corporate bonds; 3) ESG measures are not reliably associated with future credit excess returns; and 4) ESG measures are negatively associated with the future volatility of credit excess returns. While the direct investment impact of sustainability is modest, there still is considerable interest from asset owners to ensure credit allocations are sustainable. We find that it is possible to incorporate both static and dynamic exclusion screens, positive tilts toward more sustainable issuers, and economically meaningful reduction in carbon intensity, with minimal portfolio distortions. Thus, a well-implemented systematic approach has the potential to offer attractive risk-adjusted returns in a sustainable manner.

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The Journal of Fixed Income: 31 (4)
The Journal of Fixed Income
Vol. 31, Issue 4
Spring 2022
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Sustainable Systematic Credit
Peter Diep, Lukasz Pomorski, Scott Richardson
The Journal of Fixed Income Apr 2022, jfi.2022.1.136; DOI: 10.3905/jfi.2022.1.136

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Sustainable Systematic Credit
Peter Diep, Lukasz Pomorski, Scott Richardson
The Journal of Fixed Income Apr 2022, jfi.2022.1.136; DOI: 10.3905/jfi.2022.1.136
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  • Article
    • Abstract
    • DATA
    • INITIAL RESULTS
    • SUSTAINABILITY AND CREDIT SPREADS
    • SUSTAINABILITY AND SYSTEMATIC SIGNALS
    • SUSTAINABILITY AND FUTURE CREDIT EXCESS RETURNS
    • PORTFOLIO CONSTRUCTION: A SUSTAINABLE SYSTEMATIC CORPORATE BOND PORTFOLIO
    • EXCLUSIONS: HOW LARGE AND HOW SIGNIFICANT?
    • ESG: SUSTAINABLE ALPHA?
    • SUSTAINABILITY ‘TILTING’ AND CARBON REDUCTION
    • CALIBRATING ESG DESIGN CHOICES AND THE RESULTING PERFORMANCE
    • CHARACTERISTICS: A SUSTAINABLE SYSTEMATIC CORPORATE BOND PORTFOLIO
    • GENERAL DISCUSSION
    • CONCLUSION
    • ACKNOWLEDGMENTS
    • ENDNOTES
    • REFERENCES
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