How escalating demands in the labelled bond space are changing practices for investors and what you need to do to keep pace
Investor thirst for sustainable investments across all asset classes has seen fixed income issuance creation and supply skyrocket year-over-year to meet the demand. The labelled bond space has exploded, with labelled issuance growing 69% between 2020 and 2021.
This market boom and increasing focus on labelled bonds represent a significant challenge for investors, where issues around information and behaviours have led to controversy, adverse headlines and even sanctions, along with widespread concerns around greenwashing. There is growing scrutiny of corporate activity and behaviour by stakeholders, particularly from investors who also have increased discrimination and surveillance of their investments. When taken with increasing regulatory and compliance requirements, these factors demonstrate the need for next-generation high-quality data and analysis of both companies and the investments into them.
ESG investing is no longer a niche pursuit but rather rapidly becoming a go-to strategy for investment managers looking to meet the increasing demands and ESG awareness of their end capital owners. The boom in the labelled bond space signifies a continuing market shift of entities using ESG principles and metrics to shape how they attract capital and assist their transition towards sustainability and away from harmful activities. This is coupled with a desire from asset owners and asset managers to adjust investment strategy and investments to support those companies pursuing that mission. Regulation is also a driving force in this, creating distinctions between fund types, such as EU Article 6, 8 and 9 funds for asset managers to grapple with.
This white paper seeks to help investors understand the challenges and drivers in ESG investing, including:
What are the interrelated aspects of E, S and G factors?
Up until now, many ESG analyses have focused primarily on environmental risks and impacts, particularly as issuance has predominately been skewed towards Green bonds. However, with the rise of sustainability-linked bonds, a wider and more comprehensive view is becoming increasingly important. A recent analysis by Sustainable Fitch has highlighted the importance of the social impact of issuers’ business activities and how that should contribute to higher ESG Entity Ratings.
Enabling comparability of debt instruments from an ESG perspective
One of the key questions asked of ESG leaders and analysts is “how does this particular asset in my portfolio stack up against similar instruments in this sector, industry or geography?” This comparison is essential to be able to execute investment strategies – exclusion, integration, tilt, best in class or impact.
Identifying and avoiding greenwashing
A more detailed and granular understanding of sustainability and what that means for the various entities and instruments are required and one that balances both existing activities with aspirations, policies and outcomes. The current data offerings often are unclear about the interaction or weightings of existing business activities, use of proceeds, transition strategies or KPI definitions and tracking. When combined with patchy and inconsistent monitored coverage, this makes it incredibly challenging for investors to consider actual ESG impact and performance at the entity and instrument level, leaving them open to accusations of supporting greenwashing.
About Sustainable Fitch ESG Ratings
Sustainable Fitch ESG Ratings can be used in investment strategy, security selection or exclusion, issuer engagement, and stewardship. They also support disclosure and understanding of ESG themes within an investor’s portfolio. ESG Ratings support portfolio construction where the overall ESG rating, or sub-components, are used for positive/negative screening and ESG optimization at the entity or instrument level. Another use case is benchmarking and performance, where ESG Ratings can be used for weighting or inclusion/exclusion. ESG Ratings are also a useful tool for issuers and stakeholders to communicate alignment, ESG quality and thematic breakdowns.