Investors who once thought little about what their portfolios were supporting have elevated purpose and impact towards the top of their agendas in recent years.
The spark came from a group of Swedish pension funds a decade ago. Alert to the threat of climate change, they wanted to find investments that supported climate-friendly outcomes. They also wanted high-quality, liquid products that would not carry project risk, and transparency on how their investments would achieve stated goals.
The group approached the World Bank in 2008 to design what became the green bond — a product that has raised more than $500bn since then. Green bonds help investors address the environmental, social or governance risks that can have a material effect on returns. The concept behind it is now expanding into other types of so-called labelled bonds, namely those dedicated to a specific social purpose.
The Seychelles, a coral reef-rich archipelago in the Indian Ocean, last month issued the first “blue bond”— so named because the aim is to support marine and fisheries projects. The island nation raised $15m from investors, including Calvert Impact Capital and Nuveen.
US mortgage lender Fannie Mae raised $27.6bn in 2017 for green mortgage-backed securities. Investments were underpinned by green-certified properties or buildings that reduce water and energy use. Elsewhere, Fiji raised $50m in the first emerging market sovereign green bond last year to fund projects to enable the island group to withstand the effects of climate change.
Crucially, since returns are not linked directly to projects, investors are not forced to take on performance risk in addition to the credit risk associated with the issuer. Transparency and impact reporting are inherent to the green bond process. However, as guidelines are voluntary, investors should carry out due diligence on issuers as they would for any other bond.
Issuers now include companies, banks of all sizes and several countries. A record $160bn of green-labelled debt was sold in 2017, according to Bloomberg data. Yet while the growing variety of issuers and products is encouraging, it is important to bear in mind that not all products are the same. Some sceptics also struggle to reconcile, for example, the environmental aims of finance projects with issuers that are significant producers of CO2. Investors should consider issuers’ sustainability practices before deciding whether a product meets their own expectations.
Every bank that is active in the international capital markets has staff dedicated to green or sustainable bond financing and green lending criteria are being incorporated in loans. The challenge is to build on this to move from green towards sustainable capital markets. Investors are increasingly likely to ask: “How is this making a positive impact to society?” And they will expect solid evidence in the response.
Greater transparency on the impacts achieved and advances in technology to capture better data will help investors contribute towards a more sustainable future.
Source Financial Times