Global Sustainable Total Return Bond Strategy: Reporting on the impact of our investment decisions 2023

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A Letter of Introduction From The Portfolio Managers

2023 was the year of a widely anticipated recession that never happened as global fixed income investors found themselves navigating uncertainty surrounding growth, inflation, labor markets, supply chains, monetary and fiscal policy, and geopolitics. See our article Economic Indicators: The Tale of Two Charts.

As we discussed in our article, A New Fixed Income Regime – An Old Normal?, we are operating in a new economic reality that calls for adaptation, resilience, and flexibility. Businesses, investors, and policymakers must prepare for a world where the economic landscape shifts more rapidly and with greater intensity—and this is only exacerbated by the sustainability challenges that we face today from energy transition, to addressing rising inequality and changing demographics, to navigating increasing geopolitical tensions. The investment strategies that worked over the last 15 years may no longer be sufficient as we navigate the uncharted waters ahead. This is why we take a dynamic and flexible approach to managing portfolios, integrating both top-down and bottom-up research, that we believe is critical to generating alpha and providing capital preservation for clients.

What is so unique about global fixed income is the necessity and ability to navigate and address an array of sustainability challenges from multiple angles—whether it’s the public sector through sovereign bonds or the private sector through corporate bonds (and everything in between). We are undergoing a major economic transformation that will require a concerted effort among many different parties to effectuate the financial, societal, and environmental outcomes that we believe are important to building sustainable, resilient economies.

Over 2023 we continued to see quality and standardization of sustainability data in fixed income investing being a challenge, but we also see improvements, especially as it becomes ever more obvious how sovereign bonds as an asset class can navigate and address key environmental and social challenges and as sustainability factors become increasingly economic. In 2023, we also continued to build out our fixed income research team, including the addition of another sustainable investment research analyst. We bolstered our approach to sovereigns, including an increasing focus on engagement, which we discuss in greater detail in this report. We also had representation at COP28, the UN climate conference, for the first time, which highlighted the importance of bringing together the public and private sector and the role of the sustainable debt markets in addressing key issues like climate change.

One of the core benefits that in-depth sustainability research can provide is to identify high quality investments with lower risk that improve downside protection. While our team strives to deliver on this core objective we are heartened by the positive outcomes we continue to see from the holdings within our portfolio, be it from a company like CaixaBank which is driving financial inclusion as Europe’s largest private microfinance institution, our exposure to mortgage-backed securities that focus on low-income homeowners, affordable multifamily units, sustainable commercial buildings or environmental improvement projects or our sovereign engagement on climate change though initiatives such as Investor Policy Dialogue on Deforestation (IPDD), relevant to Brazil and Indonesia, and the PRI pilot sovereign engagement with Australia, just to name a few.

Despite the rapid changes occurring within this space, we have not altered our investment process, and we remain committed to our focus on both performance and impact. We hope you find this report informative and we welcome a conversation with you about the work we are doing.

We hope you enjoy reading the report.
Sincerely,

^{*Brown Advisory entities included are: Brown Advisory LLC, Brown Investment Advisory & Trust Company, Brown Advisory Ltd., and Brown Advisory Trust Company of Delaware, LLC.}