Introduction

Responsible and sustainable investments are experiencing ever-increasing demand. The COVID-19 pandemic has accelerated this trend, as investors seek to address societal needs, as well as longer-held environmental concerns. Global accords, such as the Paris COP21 agreement and new regulations specifically targeting sustainability considerations, such as 2020’s European Union Taxonomy, are playing a vital role in driving demand for innovative ways to address climate change and or other pressing societal issues.

While equities have perhaps been the dominant focus for responsible investment, fixed income has quietly been addressing these challenges through a series of innovative Environmental, Social and Governance (ESG) products.

The growing status of ESG integration underlines the greater focused being placed on how companies tackle both social and environment issues

These trailblazing bonds, which include green, social and sustainability bonds, have enjoyed a surge in popularity in 2020, with issuance expected to approach USD425 billion for the year¹. While this figure only represents a fraction of overall global debt issuance, the growing status of ESG integration underlines the greater focused being placed on how companies tackle both social and environment issues.

This Insight aims to provide a brief overview on each of these fixed interest vehicles, outlining their key objectives, the differences between them and provide examples of outstanding holdings that exist with EdenTree’s responsible and sustainable fixed interest portfolios. Additionally, we recognise that there are a number of frameworks investors use to assess their responsible investment exposure, therefore we reference the relevant UN Sustainable Development Goals of these instruments and also highlight the ESG criteria they seek to address.

Firstly, we will cover green bonds – these are arguably the most widely known ESG fixed interest instrument, with many governments having launched (or are considering launching) these bonds to help finance their environmental initiatives. Secondly, we will consider social bonds and retail charity bonds – a category of securities possessing strong social characteristics that have largely remained under the radar until 2020 when issuance has skyrocketed. We then turn to sustainable bonds and touch on their more recent subset, sustainability-linked debt, while our final section examines the novel concept of transition finance.

Sources

1. Moody’s as at 16/11/2020; https://www.moodys.com/research/Moodys-Sustainable-bond-issuance-hits-record-high-in-Q3-as--PBC_1253782