Sustainable Bottom Line: The case made for fixed income in sustainable investing rests on the proposition that fixed income is uniquely suited to sustainable investing.
Introduction
Presenting at Crane’s Bond Fund Symposium 2026, held in Boston on March 19-20, 2026, Henry Shilling made the case for fixed income in sustainable investing, with an accompanying slide presentation.
The case is based on the observation that focused or labeled long-term sustainable fixed income funds represent a tiny fraction of total conventional taxable and municipal bond funds. This, even as fixed income is uniquely suited to sustainable investing, suggesting that focused sustainable fixed income is underrepresented relative to its potential. The gap is an opportunity for fixed income managers.
The case for fixed income in sustainable investing
Focused or labeled long-term sustainable fixed income funds make up just a tiny fraction, less than 1%, of the $7.6 trillion in total taxable and municipal fixed income mutual fund and ETF assets under management. This represents a significant gap and an opportunity for asset managers.
Fixed income is structurally suited to sustainable investing for the following facts and reasons:
- Capital allocation is explicit: When you buy a bond, you know exactly where your money goes and for how long.
- ESG analysis or ESG integration is credit analysis: Environmental risks, governance failures, and social instability all affect an issuer’s ability to repay obligations in full and on time. This is not an add-on; it is fundamental.
- Alignment with long-term outcomes: Bond maturities naturally match the time horizons of sustainability goals.
- Portfolio construction: Sustainable fund portfolios can often maintain sector, duration, and credit quality profiles that are similar to conventional benchmarks.
- Sustainable fixed income funds can generate attractive performance results, i.e. in line with the market, however their performance track record is limited and it does not lend itself to simple comparisons against conventional funds. This is due to the significant disparity that exists between focused sustainable funds and conventional funds in terms of the number of funds within each segment, number and type of fund categories, limited number of index tracking funds, average fund size and number of fund managers. That said, a pointed evaluation of performance results supports the hypothesis.
- The above characteristics facilitate outcomes-based reporting and disclosure for the benefit of investors.
With that, the industry will still have to step up its education efforts, the adoption of standards and definitions as well as reporting and disclosure practices that sustainable investors desire.
Investor interest in sustainable investing exists, even in the light of political tensions in the U.S.
– Institutional demand has not diminished.
– There is strong interest in sustainable investing on the part of Gen Z (99%) and Millennial (97%) investors who stand to benefit from an unprecedented intergenerational wealth transfer.
Even as some initiatives slow, record levels of forward-looking capital are required for mitigation, adaptation and AI build outs, perhaps around $9 trillion per year or more for the next 10-years or so. The investing landscape is huge, with opportunities to suit different investor types and investment approaches, and fixed income will play a significant role in financing these initiatives. At the same time, it will be important for investors to take stock of and evaluate potential risks
The slide presentation can be accessed here: Crane Bond Fund Symposium 2026 Presentation.
Sustainable investing defined
While there is no universally accepted framework and definitions continue to evolve, today sustainable investing refers to a range of overarching investment approaches or strategies. That said, many practitioners agree that these approaches encompass the following strategies that may be employed individually or in combination:
Values-based investing. Also referred to as faith-based investing, socially responsible investing, responsible investing, ethical investing or investing based on a set of morals, the guiding principle is that investments are based on a set of beliefs with a view toward achieving a positive societal outcome. Typically, this approach is executed using exclusions as well as negative/positive screening.
Negative/positive screening or exclusionary strategies. Negative/positive screening is the process of identifying companies or other entities that score poorly or highly on environmental, social and governance (ESG) factors relative to their peers and underweighting or overweighting these in investment portfolios. On the other hand, an exclusionary strategy refers to the exclusions of companies or certain sectors from portfolios based on specific ethical, religious, social, environmental or governance guidelines or preferences. Traditional examples of exclusionary strategies cover the avoidance of any investments in companies that are fully or partially engaged in gambling and sex related activities, the production or manufacturing of alcohol, tobacco or firearms, or even atomic energy. These exclusionary categories have been extended in recent years to incorporate additional considerations, for example, firms that are the subject of serious labor-related actions or penalties by regulatory agencies or demonstrate a pattern of employing forced, compulsory or child labor, or firms that exhibit a pattern and practice of human rights violations or are directly complicit in human rights violations committed by governments or security forces, including those that are under US or international sanctions for grave human rights abuses, such as genocide and forced labor. That said, it should be noted that significant policy shifts and investor sentiment are taking place in North America and Europe regarding the treatment of nuclear energy and the defense sector, driven by recognition of nuclear energy’s role in meeting the dual goals of energy security and net zero emissions while the war in Ukraine has been responsible for shifting the perception and interest among institutional investors in the defense sector.
Closely related is the strategy of divestiture or divestment. Divestiture strategies involve current holdings that are liquidated over time as their eligibility is no longer consistent with the owner’s objectives, such as fossil fuel companies. But divestiture strategies may also involve a much broader universe of securities, such as when for example, divestiture strategies were applied to apartheid practices in South Africa in the 60s and 70s. At that time, any company doing business with South Africa was taken off the list of eligible investments.
Impact investing. Still a relatively small but growing slice of the sustainable investing segment, impact investments are incremental (additional) moneys directed to companies, organizations, and funds with the intention to achieve measurable social and environmental impacts alongside a financial return. Impact investments can be implemented in both emerging and developed markets and made across asset classes, such as equities, fixed income, venture capital, and private equity. In each instance, the objective is to direct capital to address challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services, including housing, healthcare, and education.
Historically, impact investments have targeted a range of returns from below market to market rate, depending on the investors’ strategic goals. But increasingly, impact investing strategies are expected to at least achieve risk-adjusted market rates of return.
A more widely practiced yet less rigorous definition of impact investing involves providing direct exposure to issuers or projects that managers believe have the potential to achieve social or environmental benefits.
Thematic investing. An investment approach with a focus on a particular idea or unifying concept, for example securities or funds that invest in solar energy, wind energy, clean energy, clean tech and even gender diversity, to mention just a few of the leading sustainable investing fund themes. Investing in low carbon emitting stocks and bonds or green bonds or funds also fall into the thematic investing category.
ESG integration. This is a widely practiced (some data suggests the most widely practiced) investment approach by which environmental, social and governance factors and risks are systematically analyzed and, when these are deemed financially relevant and material to an entity’s performance, they will influence decisions on whether to buy or hold a security, and to what extent. Such considerations may lead to the liquidation of a security from the portfolio but at the same time, these factors may also identify investment opportunities.
Shareholder advocacy, issuer engagement and proxy voting. These strategies, which leverage the power of stock ownership in publicly listed companies and, regarding engagement, the power of bond investments, are action-oriented approaches that rely on learning about each company’s ESG practices and related risks and opportunities. These strategies also extend to influencing corporate behavior through direct corporate engagement, filing shareholder proposals and proxy voting.
Structural sustainability. The scope for expressing sustainability objectives through security selection or ownership rights in money market funds is inherently limited by regulatory requirements and liquidity mandates. As a result, many sustainable money market fund offerings pursue sustainability objectives through structural mechanisms that operate outside traditional portfolio construction, such as inclusive intermediation practices (e.g., broker-dealer selection and distribution partnerships) and the allocation of adviser revenues to charitable or social purposes. In this analysis, such approaches are characterized as forms of “structural sustainability,” reflecting their focus on market processes and economic flows rather than on portfolio composition or issuer engagement.
Updated 3/25/2026
