The researchers looked at three factors: ESG Risk Rating, Sustainlytics’ leading data offering that looks at the physical financial risk associated with ESG issues; Controversy scores, which relate to controversial issues surrounding a company that could negatively affect it, such as the Dieselgate scandal with Volkswagen; and product participation screens, where issuers engage in products that are not considered suitable for the ESG index, such as nuclear weapons and civilian firearms.
“From there, we divided those elements on the bond side into 27 buckets to order the securities and pick the top 50% most durable bonds in each bucket,” Binns says. “Those 27 buckets are really the key to making sure we come out with very market-like performance for the index.”
The end result of that screening and organization process, she says, is a benchmark in which the ESG risk is significantly lower, with performance comparable to that of the market. The best-in-class methodology is fully compatible with Morningstar’s equity offerings, which means investors can consistently adopt and apply this approach across asset classes, he added.
In addition to having a best-in-class ESG profile, the Canadian corporate debt portfolio of companies represented in the Morningstar Canada Corporate Bond Sustainability Index delivered 5.01% annualized returns over the past three years, 18 basis points higher than its parent non-ESG index. Is.
“For an equity investor, an additional 18 basis points of outperformance is really nothing,” Binns says. “But for certain fixed-income investors, it can be worthwhile, and small differences in structure can have a significant impact on performance.”