Financial Performance of Government Bond Portfolios Based on Environmental, Social and Governance Criteria

Guillermo Badía,Lourdes Torres,Vicente Pina

doi:10.3390/su11092514

Abstract

We evaluated the financial performance of government bond portfolios formed according to socially responsible investment (SRI) criteria. We thus open a discussion on the financial performance of SRI for government bonds. Our sample includes 24 countries over the period of June 2006 to December 2017. Using various financial performance measures, the results suggest that high-rated government bonds, according to environmental, social, and governance (ESG) dimensions, outperform low-ranked bonds under any cut-off, although differences are not statistically significant. These findings suggest that ESG screenings can be used for government bonds without sacrificing financial performance.

Highlights

The growth in socially responsible investment (SRI) has been notable
We addressed that point including in the multi-factor model several control variables which could be associated with the size of countries, such as gross domestic product (GDP) growth rate and current account
Six fiscal and economic variables were included in the model using a principal component analysis (PCA) process to control for determinants of international government bond returns

Summary

Introduction

The growth in socially responsible investment (SRI) has been notable. According to the 2016 Global Sustainable Investment Review [1], in 2016, US$22.89 trillion of assets were being professionally managed under responsible investment strategies worldwide, an increase of 25% since 2014. The former rose from 21.3% to 51.17% of the bond allocation, while the latter increased from 16.6% to 41.26% In this regard, the financial implications of the ESG screening processes on corporate bonds may be closely related to stock selections, since corporate bonds are associated with firms. Previous studies [4,5], which evaluated the financial performance of mutual funds that invested in socially responsible fixed-income stocks, found that the average SRI bond funds performed to conventional funds. We evaluated the financial performance of government bond portfolios formed according to ESG criteria. We contribute to the existing literature on the financial performance of SRI by examining the impact of ESG screening processes on portfolios of government bonds.

Literature Review

Ledoit and Wolf Approach

Robustness Checks

Findings

Conclusions