Expert Insights - The benefits of a responsible approach to the euro corporate bond market | Insight Investment

A responsible approach to European corporate bonds could offer investors an attractive combination of appealing returns and alignment with investors’ expectations regarding responsible investment criteria. Fabien Collado, portfolio manager of the Responsible Horizons Euro Corporate Bond strategy, explains why.

Why should an investor consider the Responsible Horizons Euro Corporate Bond strategy and its focus on euro-denominated corporate credit?

The strategy’s focus on euro-denominated corporate bonds offers investors access to a diverse and well-developed opportunity set. As at the end of June 2025 the euro-denominated corporate bond market exceeded €3.2 trillion and over 3,700 issuers (source: Bloomberg), providing investors with greater opportunities to express views on specific sectors and improve diversification versus smaller markets. Importantly, the strategy’s potential opportunity set is not limited to Europe; many global corporates issue in euros, meaning investors are not constrained by one economic region. In addition, the strategy also retains the ability to invest corporate bonds denominated in other currencies, such as sterling or the US dollar.

The euro-denominated universe also includes a broad pool of issuers and bonds with ESG-specific goals and targets, enabling portfolios that align with responsible investment objectives, which are an explicit concern for many European investors.

What are the key risks specific to a euro corporate bond portfolio, and how does your strategy aim to mitigate them?

A corporate bond is exposed to several key risks, such as interest rate, credit, currency and liquidity risk, but the Responsible Horizons Euro Corporate Bond strategy seeks to address these.

Interest rate risk arises from the sensitivity of bond prices to changes in eurozone interest rates. To manage this, our strategy employs active duration management, which allows it to adjust exposure in response to rate movements. At present the strategy’s current duration is around 4.7 years¹.

Credit risk, which reflects the possibility of issuer default, is mitigated through a disciplined focus on investment-grade issuers and a robust screening process that filters out companies with weak governance, ESG or other credentials that could affect their ability to repay debt.

Currency risk, while limited due to the strategy’s euro-denominated focus, is addressed through hedging strategies and exposure limits to non-euro assets. And we manage liquidity risk by maintaining a diversified portfolio across sectors and issuers, ensuring that the strategy can respond to market shifts without being overly reliant on any single position.

How do you look to identify risks that could derail a company?

Our proprietary ‘landmine checklist’ is designed systematically identify and score latent risks that could undermine an issuer’s creditworthiness – risks that are often overlooked in traditional financial analysis. We use it to assess factors like contingent liabilities, regulatory exposure, event risk, leveraged buy-out vulnerability, ESG shortcomings, and liquidity fragility. Each of these is scored quantitatively, allowing us to build a nuanced picture of issuer-level risk.

This tool is especially valuable in volatile macroeconomic environments. For example, during periods of trade tension or rate uncertainty, the checklist helps us identify issuers that may be disproportionately exposed to policy shifts or refinancing stress. It’s about understanding risk deeply enough to price it appropriately or to engage with issuers where we see potential for improvement.

The checklist also integrates with our ESG and climate risk frameworks, including our Prime ratings. This looks to ensure that responsible investment risks are not siloed but embedded into our credit selection and portfolio construction processes. It’s a way of aligning financial and non-financial risk perspectives, which is critical in today’s market where ESG factors can rapidly evolve into material credit events. When it comes to climate risk, we make sure to consider both transition risk and physical risk.

Ultimately, the landmine checklist aims to help us deliver well-researched, high-conviction portfolios with strong risk management. It enables us to act with discipline and foresight as we seek to ensure that the Responsible Horizons Euro Corporate Bond strategy remains robust across credit cycles and responsive to emerging risks.

What are the sectors and countries you see the most benefit from right now and what areas are you avoiding?

At present, we see the most compelling opportunities in the banking and utilities sectors.

We favour banks, which make up nearly half of the portfolio, for their strong fundamentals and attractive spreads, while utilities offer resilience. The property sector also features prominently, albeit selectively, with exposure limited to high-quality issuers.

In contrast, the strategy is underweight in the energy sector, primarily due to ESG concerns and the sector’s inherent volatility. We have also minimised exposure to technology and media and telecoms, reflecting valuation concerns and limited alignment with the strategy’s impact goals.

How do you manage the balance between bottom-up and top-down exposures?

The strategy’s investment process is a carefully calibrated blend of bottom-up and top-down approaches. At the bottom-up level, the team conducts rigorous fundamental credit analysis, incorporating ESG scoring and issuer-level impact assessments. This ensures that applicable holdings meet both financial and responsible investment criteria.

Simultaneously, the top-down perspective informs macroeconomic positioning, guiding decisions on duration, credit spread exposure, and sector rotation.

We believe this dual framework allows the strategy to remain responsive to changing market conditions while maintaining a consistent strategic direction. For example, while macro views may prompt a shift in sector weights, issuer selection within those sectors remains grounded in detailed credit research and ESG evaluation.

Given the impact of US tariffs on European companies and current spread levels, why should investors consider a euro corporate bond strategy?

Despite the current macroeconomic headwinds – particularly the impact of tariffs on European exporters and the tightness in credit spreads – there are still strong reasons to maintain or even increase exposure to euro corporate bonds.

Yes, tariffs have introduced friction into supply chains and raised input costs for many European companies. But the market has largely priced in these risks, and what we’re seeing now is a bifurcation: companies with strong balance sheets and pricing power are navigating this environment well, and they’re exactly the kind of issuers we want to be exposed to in a disciplined credit strategy.

On the spread side, it’s true that valuations are tight relative to historical averages, but that doesn’t mean there’s no value. The carry remains attractive, especially when you consider the low-default environment and the relative stability of European credit markets. In fact, with central banks likely at or near the end of their hiking cycles, duration risk is becoming more palatable, and that supports the case for investment-grade euro credit in particular.

Moreover, euro corporate bonds offer diversification benefits for global investors, especially those looking to reduce US dollar exposure.

So, while the headline risks are real, the fundamentals of the asset class remain sound. It’s about being selective, focusing on quality, and using active management to navigate the nuances of this market.

How does the strategy pursue net zero and decarbonisation?

The strategy emphasises supporting issuers that can evidence a realistic decarbonisation pathway. The strategy leverages Insight’s proprietary Insight Prime net zero ratings for corporate issuers: these help us to track an issuer’s progress on decarbonisation. In addition, the strategy targets a minimum allocation of 35% to impact bonds, including green, social, and sustainability instruments, which can include bonds that explicitly support climate solutions. The strategy conducts a rigorous analysis for each impact bond issue, which helps to identify potential greenwashing risks. Approximately 20% of bonds reviewed since the framework was established have been identified as failing to meet our expectations, underscoring the importance of Insight’s thorough and systematic approach to responsible investing.²

Why the Responsible Horizons Euro Corporate Bond strategy?

The strategy’s design seeks to deliver consistent, risk-adjusted returns through active management of European corporate credit. It leverages deep credit research and dynamic sector allocation to capture opportunities across investment-grade issuers, while maintaining a disciplined approach to risk.

In addition, an actively managed strategy, in our view, can provide investors with greater scope to exploit any potential opportunities created by volatility.

We believe the strategy’s strength lies in its ability to navigate complex credit. In our view, it’s particularly well suited for institutions seeking exposure to euro-denominated corporate debt with a focus on capital preservation and income generation.

ESG integration is fully part our investment process and we believe the strategy’s promotion of responsible investment and focus on net-zero alignment offers a robust approach that will appeal to investors seeking such characteristics.