The growing power of green bonds

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While fixed income investors can exert real influence over corporate behaviours, their environmental, social and governance (ESG) considerations should be carefully weighed against likely returns and sustainability objectives, says Insight Investment global chief investment officer Adrian Grey.

As the global investment industry moves towards a more sustainable approach embracing ESG objectives, rules and regulations such as the European Sustainable Finance Disclosure Regulation (SFDR) are helping to reshape the investment landscape.

For Adrian Grey, global chief investment officer at Insight Investment, these changes bring both opportunity and challenges for fixed income investors.

“Regulation is evolving but some of the measures regarding definitions, such as those laid down by the SFDR, are still open to interpretation and will likely require further refining and tightening going forward,” he says.

While historically equity investors are most associated with influencing corporate decision making via share voting, Grey says bond holders have their own role to play in this regard.

“There is a significant role for fixed income managers in influencing corporate ESG behaviours and outcomes. Fixed income managers have the opportunity to be in the room with corporate decision makers seeking to issue bonds and can make their influence felt as potential investors during these meetings,” he says.

“Investors can find themselves in a position where they really can influence corporate behaviours and get companies to stop certain activities if these are not considered sustainable within, say, a specific number of years. Equally, they can help encourage corporates to transition out of unsustainable areas such as fossil fuels over time. This is especially true if a company wants to issue sustainable debt such as green bonds where environmental considerations will be particularly important.”

Grey areas

Beyond the corporate influence of investors, Grey says some regulatory barriers remain vague. This could leave investors facing a dilemma over the types of investment which meet strict regulatory criteria and where the balance should lie between securing investment returns and making a genuine a commitment to responsible investment.

“There are still some areas of ESG regulation that remain unclear and many grey areas persist for investors. If a manufacturer makes, say, ball bearings and a tiny fraction of those components go into making the wheels of a tank does that mean it is involved in weapons manufacture and that nobody should buy its debt? Equally, should investors stop buying bonds in say, an Eastern European country simply because it still has too many active coal mines or should they buy the green bonds it issues because this will help the country transition away from its reliance on fossil fuel?” he asks.

According to Grey, investors must make careful judgement calls on exactly where corporate or government activity crosses red lines for their own ESG criteria while matching rules such as the SFDR requirements and balancing the need for investment returns.

“In taking too rigid an approach to ESG and sustainability criteria there is danger investors could end up narrowing down their options to a fraction of the investable universe and limiting their chance of positive returns. There is a nuance to conversations about responsible investment versus return that does bear real scrutiny,” he adds.

Long-term view

In credibility terms, Grey also believes ‘buy and hold’ type credit strategies could prove well suited to ESG strategies due to their longer-term nature.

“Real commitment to holding assets can widen the scope to seriously address ESG criteria. If investors really want to make an impact with a portfolio they cannot credibly be buying and selling the portfolio several times in six months.”

“There are limits to how fast ESG factors can be addressed and these do not always suit the turnover involved in an active investment management approach. If investors are committed to buying and holding certain strategies or assets they can help companies more easily help address longer term ESG goals and commitments such as corporate transition or offsetting carbon,” he concludes.

789782 Exp: 17 June 2022

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