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Understanding impact and engagement in fixed-income investing

Timely insights on the issues that matter most to investors.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Brian S. Ellis, CFACalvert Fixed Income Portfolio Manager and Vishal Khanduja, CFADirector of Investment Grade Fixed-Income Portfolio Management and Trading, Calvert Research and Management

      This post, focused on impact and engagement, is the fourth of a series based on Calvert's white paper: Responsible fixed-income Investing: How Calvert delivers for asset owners.

      Boston — Calvert believes that lending should be a positive force for social change and a source of long-term value. We seek to tilt portfolios to overweight issuers with favorable impact while maintaining our overall risk-reward objectives.

      "Impact" has two distinct connotations in Responsible Investing — direct and broad (also called indirect or footprint). In fixed income, direct impact is usually associated with green bonds, which fund projects in areas such as climate-change mitigation, adaptation, and resilience. Additionally, so-called social and sustainability bonds are quickly evolving.

      Green bond market growth

      The green bond market has grown steadily over the past five years, as shown in the chart below. In 2019, green-bond issuance has already surpassed $100 billion, according to the Climate Bonds Initiative1 and is projected to reach $200 billion by year-end.2


      We developed our proprietary green criteria to find the best impact opportunities while fostering portfolio diversification. We believe the best opportunities for successful long-term impact are scalable programs that deliver competitive returns.

      Our criteria includes three types of bonds:

      • Green projects - Proceeds are directed to meeting green challenges, such as providing renewable-energy resources or electric cars.
      • Solution providers - General obligation bonds from corporate issuers who derive a majority of revenue from clean or environmentally beneficial technologies, products, or services, such as renewables or water-efficiency technologies.
      • Leaders - Issuers who demonstrate leadership in material environmental issues and, thereby, elevate industry norms.

      Catalysts for innovation

      At the margin, we view our role as catalysts for innovation. For example, five years ago, providing financing for LEED-compliant buildings was a priority to bring attention to the space. This certification has now become the standard and a significant part of the green-bond market finances these projects.

      Looking forward, the investment gap to achieve a low-carbon economy is still very large. We will continue to work with issuers and investors to help close that financing gap, and on other critical projects that have yet to gain broad market acceptance.

      Active engagement

      Active engagement with senior management has long been central to Calvert's investment approach, as much for fixed income as for equities. Engagement on the fixed-income side extends to private issuers and those with limited disclosure. This interaction is critical for making investment decisions and assisting issuers in identifying areas for improvement.

      We have periodic dialogues with senior management3 and actively participate in deal road shows. These forums provide for productive dialogue in discussing how issuers are managing their material environmental, social and governance (ESG) risks and opportunities.

      We also advise issuers who provide direct impact investment opportunities for our clients. The demand for impact in public fixed income will likely continue to grow significantly. We believe having this kind of voice is necessary to encourage growth in the opportunity set while ensuring its integrity is supported by structure and scalability.

      A sustained commitment

      We believe how issuers address a range of ESG factors that materially affect their industries can enhance (or detract) from performance and impact. We are, however, in the early days of fully exploiting the power of ESG factors to enhance portfolio returns. We believe this trend has momentum and that institutions increasingly share our view. We encourage investors to consider the unique advantages of a responsible fixed-income investment approach for their portfolios.

      Bottom line: Calvert believes that lending should be a positive force for social change and a source of long-term value. We encourage investors to consider the unique advantages of a responsible fixed-income investment approach for their portfolios.

      Investing involves risk including the risk of loss. As interest rates rise, the value of certain income investments is likely to decline. Investing primarily in responsible investments carries the risk that, under certain market conditions, the investment may underperform those that do not utilize a responsible investment strategy.