Asian Dollar Bonds: Analysis of the Investment Opportunities from Integrating Environmental, Social, and Governance Variables
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Collis, Murray J
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Collis, Murray J. 2023. Asian Dollar Bonds: Analysis of the Investment Opportunities from Integrating Environmental, Social, and Governance Variables. Master's thesis, Harvard University Division of Continuing Education.Abstract
Over the past six decades, global interest and growth in sustainable investmentproducts 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.
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