Image by Mario Caruso

What You Need to Know About ESG Bonds

Environmental, Social & Governance Investing (ESG Investing) has gained popularity in recent years. 

But what about ESG Bonds? 

This blog post will talk about:

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

  • What do they finance? 

  • How do they perform vs. a non-ESG investment? 

  • What does the future potentially look like for ESG bonds? 

An Intro to ESG Bonds 

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

Despite record numbers of new investments, ESG bonds still only make up about 3% of all global bonds issued. 1 

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

Green Bonds

The "oldest" ESG bond dating back to 2007 by the European Investment Bank.  Green Bonds finance new or existing "green" projects. 

Social Bonds

First issued by  the Spanish Instituto de Credito in January 2015. 

Social bonds fund projects with positive social impact. 

Sustainable Bonds

First issued by Starbucks in 2016. 

Sustainable bonds are broader in scope and can fund both green & social projects.  

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. 

ESG bond life.jpg

What do ESG bonds finance? 

Source: Visual Capitalist  as of Aug 2020

How do ESG bonds perform compared to a traditional investment? 

Before we dig into the performance of ESG bonds, let us 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 a 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 bonds. 

esg bond performance.jpg

Source: Amundi Asset Management as of Oct 2020

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%) from 2014 - 2019

2) US Dollar based ESG bonds had slightly lower overall average return (-32 basis points = -0.32%) from 2014 - 2019

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

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

(Past performance is no guarantee of future results)

What does the future potentially look like for ESG bonds? 

Image by Drew Beamer

ESG investing has seen record amounts of new 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 blog post

The ESG bond market is currently pretty small compared to the global bond market. 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:

ESG bonds seek to provide a potentially unique opportunity for impact. 

While stocks are traded more frequently, bondholders tend to invest 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 affect the positive impact we're hoping to see... 

If you do not know where to get started, I would encourage you to check out our Ultimate Guide to ESG Investments.  

If you are 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...

We are a different kind of financial firm than you may be used to. ​

1) https://www.visualcapitalist.com/esg-megatrend-green-bonds/

2) https://research-center.amundi.com/page/Article/2020/02/ESG-Investing-in-Corporate-Bonds-Mind-the-Gap

Environmental, Social, and Governance (“ESG”) securities are subject to risks associated with their underlying investments’ asset classes. This material is provided for educational purposes only and does not constitute a recommendation to buy, sell, or hold any security. These statements are not an offer or solicitation in any jurisdiction. All investments are subject to risk of loss.