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What You Need To Know About ESG Bonds

ESG Investing has gone more and more mainstream in recent years. 

But what about ESG Bonds? 

Today we'll talk about:

  • An intro to ESG (Sustainable) bonds. What are they? 

  • What exactly do they finance? 

  • How do they perform vs. a traditional investment? 

  • What does the future look like for ESG bonds? 

An Intro to ESG Bonds 

While the sustainable investing world has seen record amounts of new investments over recent years, ESG bonds are still a relatively small portion.

Despite record numbers of new investments, ESG bonds still only make up about 3% of all global bonds issued. 

Let's look at the main types of ESG Bonds...

Green Bonds
Social Bonds
Sustainable Bonds

As you can see, ESG bonds are still relatively new in the marketplace. 

As with any investment, there is an "evolution" of change to the lifecycle. 

What do ESG bonds finance? 

Source: Visual Capitalist 

How do ESG bonds perform compared to a traditional investment? 

Before we dig into performance of ESG bonds, let's first point out two caveats:  

1) Most performance research of ESG investments has focused on stock investments. 

2) Unlike stocks, bonds are typically not investments meant to generate large investment gains. 

  • Bonds are typically purchased for their yield and because they are non correlating asset class for stocks. (they tend to zig when stocks zag)

According to a study by Amundi Asset Management, the "benefit" of using ESG data with bond investing seemingly depends on what type of bonds you purchase. 2

Mainly, European vs. American. 

Source: Amundi Asset Management 

This is broken down into European (EUR) & US Dollar (USD) based investment grade (IG) bonds. 

A few things were discovered in their research:  

1) European based ESG bonds had a slightly higher overall average return (37 basis points = 0.37%)

2) US Dollar based ESG bonds had slightly lower overall average return (-32 basis points = -0.32%)

3) The greatest benefit of ESG data was found in European ESG bonds focused on Social (S) factors. 

4) In general, ESG bonds underperformed traditional bonds during 2010 - 2013 & generally outperformed traditional bonds from 2014 - 2019.  

What does the future look like for ESG bonds? 

ESG investing has seen record amounts of investments in recent years. Most of this has been into stocks so far, but I think the trend is clear.  

To learn more about this trend, check out this article

The ESG bond market is currently pretty small. But ESG bonds are being issued more frequently.

Demand for ESG bonds has been growing, but there has not been enough supply.

 

As more companies start to integrate sustainability into their business practices, I believe the supply will grow to meet the demand. 

What this all means for you:

Bonds can at times be overlooked in a portfolio because they are the are "less sexy" than stocks. 

Stocks provide the performance, bonds provide the shock absorption of a portfolio. 

But, ESG bonds provide a unique opportunity for impact. 

While stocks are traded more frequently, bondholders tend to be along for the long term. This means that fund managers may have a higher chance to affect change through shareholder activism. 

For the sustainable ESG investor, ESG bonds could be a primary tool to effect the positive impact we're hoping to see... 

If you don't know where to get started, I would encourage you to check out our Ultimate Guide to ESG Investments.  

If you're on the fence about ESG investing, check out Five Reasons Why you should consider Sustainable Investing. 

If you want tools so you can do your own investment research, check out these tools.  

If you prefer to delegate, feel free to schedule a phone call.  We're happy to help...

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© Greater Good Financial 2020


Advisory services offered through Resources Investment Advisors, LLC. ("RIA"), an SEC-registered investment adviser.