Green bond growth is encouraging, but investors should take care to look beyond the “green” label when purchasing bonds.
As environmental issues have become more important to the younger generation, student voices for progress are receiving a louder bullhorn at U.S. universities. Overall, millennials have increasingly expressed certainty that environmental progress is important. Polling data reveals that 43 percent of 16- to 24-year-olds believe “green” technology is the most important element to improving their community’s economy. In that same age group, 64 percent stated that solar power is one of the two most vital natural resources for future success.  Due to millennials’ growing interest in sustainability, universities are pouring more resources into efforts such as green on-campus infrastructure and environmentally focused academic programming.
After all, young people are the “customer base” of higher-education institutions, and sustainability efforts could help universities differentiate themselves and build their brand. Upfront investments for programs such as efficient water and sewer systems or university-run bike share programs could potentially pay off in the future by lowering building costs or by boosting brand equity. For example, the University of Arizona’s Office of Sustainability promotes the university’s AASHE “Gold Rating” for sustainability and its top rankings for environmental research. According to a Princeton review survey, 61 percent of respondents said that having information about colleges' commitment to environmental issues would contribute "strongly," "very much" or "somewhat" to their college application or enrollment decisions.
Breckinridge has participated in the sustainable groundswell across U.S. university campuses by teaming up with the Sustainable Business Lab (S-Lab) at the MIT Sloan School of Management. Students in the S-Lab accepted Breckinridge’s proposal to perform a joint study on the impact of environmental, social and governance (ESG) factors on fixed income. Importantly, students at Sloan were interested in expanding the conversation on ESG in fixed income markets, as they wanted to participate in a sustainability project in general, and they noted that relatively less was available on ESG in fixed income versus equities.
In the study, students performed quintile relational analysis and time series regressions to determine the potential relationship between Bloomberg ESG disclosure scores and FactSet option-adjusted spreads (OAS). The study analyzed companies in the Russell 1000 Index with data taken from 2005 to 2015. Students also wrote ESG case studies for motorcycle-maker Harley Davidson and coal company Peabody Energy. The study’s findings include:
- In general, companies with higher-ranking ESG disclosure ratings had lower OAS – particularly during market turmoil.
Control variables such as interest coverage and return on assets demonstrated strong positive relationships with ESG criteria.
- The regression analysis calculated a statistically significant relationship between ESG disclosure scores and OAS, most clearly during highly volatile bear markets.
- A correlation matrix of data illustrates a positive relationship between high ESG disclosure scores and low, stable spreads.
- ESG disclosure scores are highly influenced by a company’s level of disclosure.
- Students acknowledged the limitations of solely looking at a firm’s Bloomberg ESG disclosure score. Looking at an individual firm’s ESG disclosure score and its components may not always indicate a company’s level of sustainability; rather, investors should consider the individual circumstances of each issuer (such as its level of disclosure or its industry) to determine ESG risk. Despite the positive relationship between ESG disclosure scores and OAS for the broad universe of corporate debt, there are exceptions to the rule (such as Peabody Energy).
The Sloan study increased students’ awareness of ESG issues in fixed income, and helped them to think analytically about the relationship between ESG factors and investment returns. For more information on the S-Lab and other student projects, please visit http://mitsloan.mit.edu/actionlearning/labs/s-lab-projects.php.
We enjoyed working with the S-Lab team and look forward to maintaining the relationship. The project is just one example of the rising ESG research efforts across campuses. We think the environmental movement across university campuses is important for bond issuers and only adds to the investment case for ESG. The movement foreshadows a continued environmental focus from millennials as they age, enter the workforce and make decisions as adult consumers.
 Millennials are those between the ages of 18-34 in the year 2015. Source: Pew Research Center, April 25, 2016.
 The Clinton Global Initiative America/Bing Pulse Survey, June 24, 2014. The CGI-Bing Pulse Poll was commissioned by Microsoft and conducted online on June 19, 2014 by research firm Penn Schoen Berland among a representative sample of 1,000 Americans aged 16 and above.
 AASHE, The Association for the Advancement of Sustainability in Higher Education, Campus Sustainability Hub.
 The University of Arizona, as of August 25, 2016. AASHE is The Association for the Advancement of Sustainability in Higher Education.
 The Princeton Review 2016 “College Hopes & Worries Survey Report.” The 2016 survey appeared in The Best 380 Colleges: 2016 Edition (Penguin Random House, August 2015) and on www.princetonreview.com. Findings based on responses from 10,434 people (including students applying to colleges and parents of college applicants).
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