When it comes to fixed income, passive index strategies face a number of limitations. Chief among these is the data challenge. Due to the nature of the fixed income universe, where a large number of issuers are not publicly listed companies, data coverage is average at best, with up to 40% of the investment universe typically not covered. Naturally, this creates a problem for building an ESG fixed income index.
But even where data is available, there is no guarantee that a company with a high ESG score is truly making the world a better place. Graeme Anderson, a founding partner at TwentyFour Asset Management, says "rule-based systems can be gamed" by large corporations that have money to throw at ESG reporting, resulting in ESG data being skewed in their favour. He gives Coca-Cola as an example, a company most of us would not consider an ESG investment. The company contributes to plastic pollution and child obesity by selling sugary drinks to children.
However, Anderson points out that in most databases, the company scores well as it knows how to profile itself. "So if you just take a rating or a profile with a passive fund, you're probably buying Coca-Cola," he says.
