Investment Insights

Sustainability bonds: Adding more than color to the investor palette

11 March 2021
Sam Morton
Sam Morton
Head of European Investment Grade Research
Sustainability bonds
Overview
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We expect rapid growth of the labeled sustainability bond sector in 2021. This requires fixed income practitioners to broaden their research toolkits and take an active approach to differentiating between bonds with good ESG credentials and those that could disappoint.
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To make this distinction, we believe it is vital to assess an issuer’s sustainability bond program. Invesco Fixed Income (IFI) considers such factors as the use of proceeds, the management of proceeds and reporting and external verification.
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Labeled bonds, such as transition bonds and sustainability-linked bonds, introduce greater complexity into the investment research process. The silver lining is likely to be greater engagement with issuers, which we believe will only increase as ESG analysis matures.

We expect 2020’s significant growth of labeled sustainability debt issuance to continue (BNEF reported that USD530 billion was issued globally in 2020, up 60% year-over-year), partly fuelled by the European Commission’s September 16 announcement of its intention to issue an additional €225 billion of sustainability bonds to help fund the response to the pandemic (more than issued by the whole market in 2017 or 2018). The growth of this segment - with many issuers bringing inaugural deals in 2020 - is set to continue in 2021 and makes sustainability bonds an increasingly core holding for fixed income investors.

This evolving asset class poses several new questions to fixed income analysts and portfolio managers alike, requiring a broader analytical toolkit than our traditional new-issue or environmental, social, governance (ESG) analysis. This means that a more active and research-intensive approach is required to differentiate bonds with good ESG credentials from those that could disappoint.

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