Asian Dollar Bonds: Analysis of the Investment Opportunities from Integrating Environmental, Social, and Governance Variables

Abstract

Over the past six decades, global interest and growth in sustainable investment products have been remarkable. Since the modern practice of sustainable investing emerged from the socially-responsible investing (SRI) movement of the 1960s, the total amount of investments defined as sustainable has grown to over US$35 trillion (Corporate Finance Institute, 2022). However, the development of sustainable investing has come with valid questions about how to measure the outcomes created by integrating environmental, social, and governance factors into investment practice (Organisation for Economic Co-operation and Development, 2020). As the demand and supply of sustainable investments is expected to accelerate in the coming decade, how will investors know if they are doing well and also doing good (Institute of International Finance, 2022)? In this context, research considering whether sustainable investments in high-growth regions like Asia offer improved returns, or impose investment costs, will be vital to ensure that much-needed capital is attracted to critical issues like the global energy transition. Capital markets globally currently total approximately US$250 trillion, with more than half of this total invested in bonds (Securities Industry and Financial Markets Association, 2022). Within this total, sustainable-themed investments are projected to account for one-third of global assets under management by 2025 (Bloomberg Intelligence, 2021). With so much money flowing into sustainability-themed investments globally, this thesis aimed to evaluate if investor capital in growing markets like Asian dollar bonds is efficiently and effectively allocated. To achieve this, I examined the relationship between environmental, social, and governance (ESG) characteristics, or variables, of Asian corporations and the unexplained investment returns (or residual performance) of their U.S. dollar bonds. I collated a dataset consisting of three years of investment performance and associated ESG data across 43 potential variables, controlling for typical drivers of returns such as interest rate and credit spread moves. The sample considered the performance attribution history of more than 3,000 securities, representing over US$1 trillion of market capitalization, in the Asian corporate dollar bond universe (Bloomberg L.P., 2022a). I then fit a logistic model to identify which ESG variables have a positive relationship with the residual performance of Asian dollar bonds. Over the period from July 2019 to June 2022, a number of ESG variables predicted residual performance. My analysis found that biodiversity impact scores, board independence, pay scale factors, and green-bond labeling of securities had statistically significant and positive relationships with the unexplained investment returns of Asian dollar bonds. However, other ESG variables, such as carbon emissions intensity, were found to be statistically non-significant. Importantly, the results lead to the conclusion that ESG variables have a small but positive impact on the investment returns of Asia dollar bonds. In doing so, this thesis confirmed that investors should consider ESG analysis as a potential source of portfolio returns in their Asian dollar bond portfolios.