Hills Sustainability
11 December 2023 Financial Analysts Journal Volume 80, Issue 1

Bonds with Benefits: Impact Investing in Corporate Debt

  1. Desislava Vladimirova
  2. Jieyan Fang
A shift toward impact assets complicates the goal of outperformance for sustainable investing. Examining sustainable investment in actively managed factor strategies in credit, this study demonstrates opportunities for sustainable alpha at low cost.
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The regulatory focus on quantifiable sustainable investing shifts investors’ demand toward impact products, which creates challenges in achieving their primary target of outperformance. This study demonstrates the implications of sustainable investment in actively managed credit portfolios using carbon emissions, Sustainable Development Goals (SDGs), and green bonds. All three measures exhibit a low correlation with systematic factors, such as value and momentum, providing an opportunity for a sustainable alpha. Furthermore, we demonstrate a concave relationship between outperformance and sustainability. Therefore, systematic investors achieve a sustainable portfolio at a low cost, whereas sustainability-oriented investors harness factor returns to meet their initial targets.

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