​Including ESG in fixed income ‘boosts market efficiency’, says Norway’s GPFN

Two leaders of Norway’s domestically focused sovereign wealth fund have called for more work into the effects of environmental, social and corporate governance (ESG) factors in fixed income management.

Jørgen Krog Sæbø, CIO for fixed income at Folketrygdfondet, and Lars Tronsgaard, deputy CEO, wrote in an article for Norwegian financial newspaper Finansavisen: “Responsible fixed-income management has developed over the last few years to become increasingly central in the management of bond portfolios.

“Our experience with responsible management is that it provides a more holistic understanding and deeper knowledge of the companies. This contributes in turn to better investment decisions and better functioning capital markets.”

Folketrygdfondet oversees the Government Pension Fund Norway (GPFN), the smaller, Nordic-investment counterpart to the huge Government Pension Fund Global. It had total assets of NOK252.3bn (€25.3bn) at the end of March. Its strategic asset allocation is 60% equities and 40% bonds.

Krog Sæbø and Tronsgaard said that working with ESG led to improved results for companies’ bottom lines – for investors as well as for the environment.

“In equity management, this effort has yielded results,” they said. “Now the time has come for fixed-income management.”

Responsible management involved mapping risk factors associated with ESG to improve returns, as well as working to improve the efficiency and transparency of capital markets, the pair wrote.

“Responsible management is not about ethics, but about creating returns based on good risk assessments where ESG is also taken into account,” they added.

Folketrygdfondet was dependent on companies managing to service their debt, Krog Sæbø and Tronsgaard said, meaning it also had to assess whether the businesses had control over their ESG challenges.

A report published earlier this month by JP Morgan Asset Management found that ESG scores could enhance fixed income portfolio outcomes via lower drawdowns, reduced portfolio volatility and, in some cases, marginally increased risk-adjusted returns.