Over the last 12 months we have seen a giant leap forward in environmental, social and governance (ESG) milestones, driven in part by the health and economic crisis induced by the global pandemic.
The role fixed-income markets have in funding the journey towards a better environmental and social future is crucial, as the majority of funding required is expected to come from debt rather than via equity. This is very much a ‘journey’, as a large range of stakeholders will take time not only to agree on the roadmap and how best to achieve it in our lifetime, but also on how to put their plans into action.
We expect to see a continued growth in ESG-labelled bond issuance after 2021 set new records, albeit the US$1.6 trillion (per ICE Green, Social & Sustainable Bond Index)1 is still a small amount in the context of the overall size of the global bond market today. Labelled bonds are also often an area of the market that creates much debate and commentary.
As central banks start to tighten monetary policy, and in some cases talk of reversing quantitative easing (QE), the reduced amount of fiscal stimulus means that some of the emergency-induced bond supply is unlikely to reoccur. This issuance has acted as an extra catalyst for growth in labelled bonds, often driven by governments and agencies. That said, we still expect governments to be the largest issuers of labelled bonds globally.
We expect to see a continued broadening out of sectors as issuance is still quite concentrated in the finance, utility and real-estate sectors.
Scott Freedman, portfolio manager, Newton Investment Management.
Doc ID: 948000
1 Lord Abbett. ESG Investing: Keeping Score on Sustainability-Linked Bonds. May 2021.