Emerging markets embrace impact bonds

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While fall-out from the Covid-19 pandemic is helping fuel explosive growth in responsible fixed income and impact investing across both emerging and developed markets, investors must always assess their target aims and objectives carefully, say Insight portfolio managers Simon Cooke and Fabien Collado.

As the worst of the Covid-19 pandemic begins to fade, its legacy could provide a major boost to fixed income responsible investment in both developed and emerging markets (EM), according to Insight portfolio manager Simon Cooke.

Amid soaring new issuance in products such as impact and sustainability-linked bonds, Cooke believes lessons learned from the pandemic are helping to drive interest in responsible investment in areas which can help protect our environment and reduce inequality.

The last two years have seen a wake-up call that has exposed the damage we’ve been doing to our environment and the sheer scale of inequality across the globe – both in emerging markets and even within large developed markets,” he says.

While Cooke contends that wealthy nations like the UK seemed to weather Covid-19 comparatively easily, poorer nations, without the same health infrastructure, proved far more susceptible. However, he believes the pandemic also exposed some troubling disparities of wealth across richer nations.

At the start of the pandemic some people believed Covid-19 would be a great leveller for people in markets such as the UK. But it wasn’t. In fact, while those in relatively well-paid jobs could usually cope with the lockdown many of those who were struggling to make a living could not,” he says.

The good news, adds Cooke, is that reflection on these themes and growing awareness of connected environmental and social needs has led to a sharp rise in interest in impact-based investment opportunity over the last 18 months. Against this backdrop, he adds, the United Nations Social Development Goals (SDGs) are increasingly becoming an industry standard against which they are measured.

EM impact

While impact bond growth continues apace across developed markets such as the European Union EM impact bond issuance is also on the rise. According to Cooke, China, Korea and Chile are leading the way in issuance, though the wider EM market is also diversifying at a rapid rate.

With 99% of the world’s poorest people living in emerging markets , poverty reduction across EM has become an absolute priority,” says Cooke.

The good news, he adds, is that responsible investment has been on the rise since 2019. The impact bond asset class has rapidly evolved and grown, with more than USD250bn outstanding as at April 2022, issued by 49 countries overall[1]. The hard currency emerging market impact bond universe now includes over 200 issuers across all major sectors.

As investors look to identify areas offering potentially attractive total returns and positive impact, emerging market impact bonds are becoming difficult to ignore, as an increasingly diversified, rapidly growing opportunity set with the potential for positive impact needed to help support the delivery of the UN SDGs and address key issues facing people, the planet, and prosperity,” he adds.

Market scrutiny

For all the opportunity impact bonds in both EM and developed markets may appear to present, both Cooke and Insight portfolio manager Fabien Collado warn investors should beware of false claims and enter the impact and sustainable bond market with their eyes wide open.

According to Collado: “You do need a robust framework to assess how well impact and other sustainable bonds work as there is evidence greenwashing – making false or exaggerated claims about the ESG benefits of investments – is going on in the market. We have noted that a significant proportion of these bonds do not appear to meet more exacting impact criteria and analysis on close inspection.

Because of growth of impact bonds in both developed and emerging markets investors do need protection against any greenwashing. Performance and reporting always need to be strong and in line what the issuer is promising. Robust reporting is critical on a bond-by-bond basis because it allows investors to track where their money is going and what is funding. If, say, an oil and gas company is issuing green bonds merely to refurbish its headquarters than that will not fit most people’s idea of responsible investment,” he concludes.

Looking ahead Collado adds that he expects to see further expansion in the impact bond market. “Impact opportunities are extending well beyond green bonds, with social and sustainability bonds other areas that are growing rapidly. The ability to identify impact issuers strongly aligned to positive environment and/or social impact outside of the ‘use of proceeds’ market should also broaden the impact opportunities for investors. Increasingly, a broadening impact universe is allowing impact strategies to have a broader reach,” he concludes.

[1] Insight, Bloomberg, as at April 2022.

988553 Exp: 28 October 2022

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