Issuance of ESG-labelled bonds might hit US$4.5 trillion ($6.05 trillion) a year come 2025, up from US$1.4 trillion last year.
This trend marks a shift where ESG investing has been mostly focused on equities and less on fixed income, according to new research by Pictet Asset Management (PAM) and the Institute for International Finance (IIF).
However, with some US$4 trillion of capital required a year to contain threat of climate change, it is “inevitable” that bond investors will chip in a bigger share for this market is “up to task”.
Raymond Sagayam, CIO fixed income at Pictet Asset Management (picture) says the development of ESG-labelled bonds is an area of the market PAM has been watching closely for some time.
“The analysis from IIF and Pictet Asset Management investment teams reaffirms our view that there is set to be a silent revolution in fixed income markets that will benefit investors, the environment and society,” says Sagayam, adding that the shift will take place over the next five to ten years.
IIF believes that by 2025, there will be few global investors who don't have a significant allocation to ESG and green investments.
See also: A US$12 bil climate fund is readying a rare bond issuance
“And if you look further ahead to 2050—when governments and companies around the world will be seeking to deliver on net-zero commitments—we will have effectively greened global bond markets, transforming our environment for the better,” says Sonja Gibbs, managing director and head of sustainable finance at IIF.
According to PAM and IIF, this growing market means “new frontiers” but also “fresh challenges”, as there is now the opportunity build investment portfolios that can mitigate climate change, preserve biodiversity and tackling inequality – while generating returns for investors.
However, PAM and IIF warn that there are risks to consider as well.
See also: India aiming to finalise carbon deals with Japan, Singapore
For one, due to their complexity, ESG bonds can be costly to analyse, requiring far greater scrutiny than their conventional counterparts. Nor do they currently fit neatly into the portfolio construction frameworks investors tend to favour.
ESG-labelled bonds can broadly consist of the following types:
Green bond: bond instrument where the proceeds are used to finance eligible Green projects such as renewable energy, energy efficiency and pollution control.
Transition bond: designed to help firms with high greenhouse gas (GHG) emissions to finance a transition to greener or lower-carbon activities or methods of production.
Social bond: fixed-income instrument whose proceeds go towards projects with positive social outcomes, such as affordable basic infrastructure, food security and access to essential services.
Sustainability bond: the proceeds of which are applied to the delivery of environmentally sustainable outcomes or some combination of green and social projects such as education, climate change and biodiversity.
Sustainability-linked bond (SLB): general-purpose instrument where the borrower commits to achieving a sustainability performance target.
Photo: Pictet
