Screening high yield bond portfolios for environmental, social or governance (ESG) criteria did not protect investors from the worst of this year’s market downturn, according to research by Lehman Livian Fridson Advisors (LLFA).

Marty Fridson, chief investment officer of income investing specialist LLFA, said indexes or strategies that skewed towards ESG or social responsible investing (SRI) criteria did relatively well compared to traditional benchmarks during the pandemic-induced crash in March and April.

However, this relative outperformance was largely because SRI indexes are tilted towards companies with higher credit ratings and away from sectors such as energy, which was hit hard by a sell-off triggered by a dispute between Saudi Arabia and Russia.

The SRI screens applied to such benchmarks were unlikely to have made much of an impact, Fridson’s research suggested.

The research comes as equity market indices with an SRI or ESG bias have outperformed traditional benchmarks in many cases over the short and long term.

All data in US dollar terms. Source: FE Analytics

Rising interest in sustainable and responsible investment strategies has driven the development of hundreds of different strategies across various asset classes, but has also increased the pressure on asset managers to incorporate non-financial factors into their processes.

While this process is well advanced in the equity space, for fixed income and other asset classes there is still a great deal of debate about how best to incorporate SRI and ESG criteria.

This is primarily because of equity investors being able to exercise their voting rights at shareholder meetings, according to Russell Investments.

In a blog post covering ESG in fixed income earlier this year, Yoshie Phillips, director of investment research for global fixed income at Russell, said it was only recently that bond investors have begun properly exploring how to use their asset class to engage with companies on SRI issues.

According to Russell’s 2019 Annual ESG Manager Survey, 71% of investors with bond-only offerings said they “often or always” discussed ESG topics when engaging with investee companies.

“We have observed that fixed income market practitioners with equity offerings leverage their equity counterparts to increase influence when engaging with the underlying companies,” Phillips said.

“And some bond managers who have limited or no equity offering try to partner with other bond managers to increase influence. Climate Action 100+, an investor-led climate engagement coalition launched in 2017, helps facilitate such bond managers to coordinate the engagement activities with other investors.”