Our investment professionals share and challenge each other’s views, creating a diverse marketplace of ideas for the Wellington Blog.
Environmental, social, and governance risks have always been key considerations in our research and investment process. These factors are particularly critical given the core objectives of a short-duration portfolio: to maximize liquidity and preserve capital while achieving attractive total return.
Importantly, adverse ESG factors increase the risks of credit deterioration and illiquidity. We believe that there are areas where these risks are not currently compensated by valuations. In our view, heightened global scrutiny of issuers from an ESG lens will eventually drive up the cost of capital for many issuers with outsized ESG risks. In addition, we think it will potentially lead to lower liquidity in their bonds as more investors avoid these issuers. As an example, the tobacco sector already has a higher cost of debt and less demand for issuers on average versus…
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