Four essays on socially responsible fixed income investment

Socially responsible investment (SRI) can be defined as an investment strategy that considers environmental, social, and governance (ESG) information, in addition to financial information, when analysing and conducting investments. The market for SRI has experienced a dramatic growth in recent years, outshining many other investment strategies. The size of the global SRI market now exceeds $21 trillion. These developments have attracted considerable attention from academic research, where the majority of studies have investigated if SRI performs significantly differently in comparison to conventional investments. Even though the global SRI market consists of approximately 40% fixed income assets, the overwhelming majority ofacademic studies have analysed the performance of SRI equity investment and left the area of SRI fixed income largely unexplored. This Ph.D. thesis comprises offour empirical essays and aims to contribute to the area of SRI fixed income. Progress into fixed income asset pricing models has been slow. Consequently, the first essay enhances the Elton et al. (1995) four¬factor model by introducing a duration factor, a global bond factor, and three exchange rate factors. The resulting nine-factor model can explain up to 95.42% ofreturn variations in fixed income fund portfolios and up to 99.97% of the return variations in individual fixed income funds in time series analysis. The second essay studies the performance of 120 SRI fixed income funds relative to conventional funds. lbis essay distinguishes itself from previous SRI fund studies by carefully addressing shortcomings identified in previous matching approaches by applying a firm matching approach. The third essay investigates if ESG expertise differentiates SRI fixed income funds in terms of their financial performance. The findings of this essay show that ESG engagement activities are a significantly differentiating performance factor. Specifically, funds from fund companies not involved in ESG engagement activities are found to perform significantly worse. The fourth essay investigates the relationship between responsible investing and bond performance, by constructing portfolios of bonds based on ESG ratings of the issuing company. The findings of this essay suggest that no news is good news in ESG bond portfolios. On the whole this thesis contributes greatly to the largely unexplored area of SRI fixed income investment