Although incorporating sustainability goals into investment portfolios is becoming increasingly popular, the challenge of balancing this approach continues to confuse investors. But a study: “Bonds with benefits: Impact investing in corporate bonds“, will be encouragement. It concludes that sustainability-oriented investors can achieve their goals with corporate debt strategies and that income-oriented factor investors can achieve a portfolio with a certain level of sustainability at low price.
The study analyzes a number of the impacts of sustainable investments in actively managed loan portfolios using carbon emissions. Sustainable Development Goals (SDGs), and green bonds, revealing a concave relationship between outperformance and sustainability. According to Vladimirova, a non-linear relationship between sustainability and factor investing is the salient result.
Desislava Vladimirova: What we mean by that is that there are two sorts of investors – those that are focused on returns and people whose investment beliefs include consideration of the environment and who subsequently also goal sustainable firms. Since a concentrate on sustainable firms would limit the investment universe, investors intuitively expect returns to diminish. What we try to point out through our research is that this is just not necessarily the case and that depending on investors’ preferences regarding the extent of sustainability they seek, there may very well be optimal mixtures that may allow them to stay profitable while still having sustainability .
Who must be concerned with your research and why?
Our results are interesting for institutional investors with a concentrate on corporate bonds. The aim of the study is to draw the eye of credit investors who need to satisfy regulatory requirements regarding sustainability, in addition to investors with a robust sustainability focus. Our research provides useful insights for all investors willing to integrate sustainable investing, as we discover that there may be an optimal solution for investors with different green preferences.
What motivated you to conduct this research and write this text?
Two reasons: One was the tutorial aspect – this was a distinct segment that was not occupied within the literature. Second: We work for an asset management company and are concerned with whether this is possible and achievable with profitable strategies – how plausible it’s to realize these two goals together.
What is recent about your study?
There is not any research on how one can integrate sustainability into lively lending strategies. We analyze measures which have not previously been discussed, akin to Sustainable Development Goals (SDGs). We confirm and are consistent with our results for 3 different sustainable measures – carbon footprint, SDGs and green bonds. We show that these three measures will be integrated into lively factor strategies. The aspects are quantifiable and the sustainable measures are quantifiable.
What do you think that are the important thing findings or takeaways out of your study?
Our study analyzes the connection between sustainability and factor investments. The most vital takeaway is that this relationship is just not a zero-sum game. We find that constructing optimized dual-target portfolios reveals a concave relationship between factor investing and sustainability, meaning that investors’ goal trade-offs are usually not zero-sum in nature. This signifies that factor investors willing to satisfy minimum sustainability standards can accomplish that with little impact on performance. And investors with a robust sustainability focus can profit from exposure to income-focused strategies while investing predominantly in sustainable assets.
What are the important practical applications of your research?
We imagine that our study will be applied to the portfolio construction technique of factor strategies. We offer a dual-objective optimization method that may consider the sustainability preferences of various investors and mix them with credit signals under plausible risk and turnover constraints. Our results show robustness across different sustainability measures and factor definitions. And so investors only have to make your mind up on their optimal factor-sustainability mix. We show that this may be very easy to realize for a practitioner who desires to be profitable and reduce carbon emissions. But we also show that investors who need to take part in environmental projects and spend money on green bonds will be profitable. We mainly show that there may be an optimal solution for everybody.
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