The craze for environmental, social and governance (ESG) assets is too big for fixed-income investors to ignore. That’s one view from M&G’s bond team, which recently highlighted an explosion in the issuance of ESG-themed corporate debt. As fixed-income investment director Mario Eisenegger notes, companies issued new ESG bonds worth $350bn in the first half of 2021. That’s already ahead of the total amount for 2020, itself a bumper year for issuance of ESG corporate debt.
Bond investors will increasingly have to account for ESG considerations, even if such issues aren’t their first priority. This is great news if you do care about it: your concerns are being catered to more widely outside the stock market. But as with stocks, this boom creates a whole set of fresh complications.
First of all, there are many different forms of ESG bonds to understand. While investors are likely to differ on both the use and interpretation of certain terms, M&G's Eisenegger has previously described the universe as follows. First, green bonds, the most established form of ESG debt, will be used to finance environmentally friendly projects. There are also social bonds, sustainability bonds (which can combine green and social projects) and 'blue' bonds, which focus on ocean conservation. Transition bonds are used to help businesses shift to a greener business model, while so-called sustainability-linked bonds tend to come with an income payment linked to the issuer hitting certain sustainability targets. A failure to hit said targets would tend to result in the payout to investors rising.