• Credit
  • Fixed Income
  • Responsible Investing

Are sustainable bonds the new smartphones?

The market for sustainable bonds to fund activities that have a positive impact on the environment or society is booming. But there are many factors to consider before investing. Not least among them is a crucial question: is your money really being used to fund the activities promised?

Are sustainable bonds the new smartphones?

Booming demand and supply

Bonds have long been a feature of financial markets. The concept is simple: a company, government or other organisation borrows money and promises to return that money in the future, while paying the lender an income on a regular basis during the intervening period.

Companies are now using these instruments to finance or refinance “green” projects and other activities that have a positive impact on society. Demand for “sustainable” bonds, as they have become known, is surging – as is their supply. A record $544.3 billion of sustainable bonds were issued in 2020: more than double the level of the previous year.1

We could compare the way sustainable bonds are developing with smartphones

We could compare the way these bonds are developing with smartphones. Early handsets had few apps and suffered from patchy wi-fi connections and prohibitive data costs. Despite these drawbacks, the technology quickly improved to the extent that smartphones are now everywhere and used for a huge range of purposes. Indeed, most people couldn’t imagine life without them.

Growth drivers

The market for sustainable bonds is growing for two main reasons:

  • New regulations are forcing businesses to address environmental issues, such as the emission of harmful gases.
  • Companies are keen to take advantage of growing demand for these bonds to finance their activities.
The sustainable bond market is growing due to regulation and investor demand

In the corporate world, sustainable bonds were initially concentrated in the financial, real estate, utility and renewable energy sectors. Now the likes of automobile companies, consumer and luxury goods firms, and mobile-phone operators are following suit.2

Spoilt for choice?

The term “sustainable bond” covers a wide variety of subsectors, including:

  • Green bonds: created to fund projects that have positive environmental benefits.
  • Social bonds: whose proceeds are used to fund initiatives that help society, such as low-cost housing.
  • Sustainability bonds: where the proceeds are used exclusively to finance a combination of green and social projects.
  • Sustainability-linked bonds: where the issuer promises to meet a target linked to environmental, social and governance (ESG) issues (“governance” refers to the way the company is managed, how it treats its workforce and suppliers, executive pay and other factors).
Figure 1: ESG bond issuance 2013-2020 ($ billion)
ESG bond issuance 2013-2020
Source: Bloomberg, Morgan Stanley Research, as of January 8, 2021

Factors to consider

There are various things to consider before investing in sustainable bonds. First, you have to decide which sector you wish to invest in. Then you need to be aware of the issue of “greenwashing”, where funds are not actually used to promote an improved environmental outcome or where it is difficult to measure whether the money raised has had the desired effect.

Is it better to invest in a bond issued by a company with a poor record on carbon emissions or one that has very low emissions?

There is also the question of whether it is better to invest in a bond issued by a company with, for example, a poor record on carbon emissions, or by a business that has very low emissions. Arguably, the impact on climate change will be greater if an investor buys a bond issued by the former, which will use the proceeds to cut its emissions significantly, rather than the latter, which has limited scope to cut emissions further.

The returns from investing in sustainable bonds is another factor, although some investors may be willing to give up some level of return if they are confident the investment will have a positive impact on the environment or society. The yield on Volkswagen’s 2028 green bond, for example, is less than its conventional bond of similar maturity (0.42 per cent versus 0.52 per cent as at 9 February 2020).

More generally, there is serious momentum behind the market for sustainable bonds. In February 2021, the French energy giant Total committed to issue all new bonds through sustainability-linked debt – the first company to do so.3 Although investors should watch out for greenwashing, if enough issuers follow in Total’s footsteps the move could be game-changing.

Three points to remember

  • Demand and supply of sustainable bonds is growing rapidly and that trend looks set to continue.
  • There are a wide variety of sustainable bonds and it is possible to target investments in a particular area of interest, such as climate change.
  • It is important to monitor how the proceeds are being used to ensure they make a real difference rather than are used for ‘greenwashing’ purposes.

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.