Aviva Investors and NN IP signal caution as sustainable bond market issuance soars.
In the midst of a surge in the issuance of green bonds, some asset managers are taking a more cautious approach on behalf of their long-term investor clients. To avoid ‘greenwashing’ or ‘sustainability washing’, firms including Aviva Investors are looking beyond the bond and more closely at the issuer.
Moody’s Investor Services yesterday reported soaring levels of green, social and sustainability bond issues. In Q1 2021, sustainable bond volumes more than tripled year-on-year to reach a record total of US$231 billion, a 19% increase over the previous quarter.
Moody’s attributes the growth to a heightened level of government policy focus on climate change and sustainable development and strong, sustained interest among debt issuers and investors.
Issuers continued to raise their focus on sustainability-linked bonds and loans during Q1 2021. Sustainability-linked bonds jumped 57% to a new quarterly high of US$8.6 billion, and should grow as issuers seek access to sustainability-minded investors while maintaining the flexibility of general corporate purposes borrowing, Moody’s said. Sustainability-linked loans hit US$97 billion in the first quarter, 29% higher than the previous record from the fourth quarter of 2020.
Sustainability-linked instruments are typically structured to incentivise the issue to achieve pre-determined sustainability objectives, while the proceeds of sustainability bonds are ringfenced to finance new or existing green and / or social projects.
Colin Purdie, Chief Investment Officer for Credit, Aviva Investors, said for a number of years, debt investors have had “a very loud voice on ESG, particularly in climate matters”. There had been a pivot towards more debt in the capital structure of companies, he added. “If capital is not well placed in the ESG spectrum, it will hit the bottom line. Debt investors are becoming more emboldened.”
Tom Chinery, Portfolio Manager for Aviva Investors’ recently launched Climate Transition Global Credit Fund, said green bonds had “brought things to life in the bond market from an ESG view”. Data was becoming more timely and more forward-looking and added to Aviva’s investment approach, he said. However, “We don’t buy bonds just because they are green”.
Drilling down into details
While some investors have focused on the use of proceeds of individual bonds, Chinery Aviva Investors’ typically focused more on the overall strategy of the individual issuers. “It is important to drive change and support companies that are making the biggest change to social and environment issues, rather than those companies that are tweaking the edges. There is validity in structures that offer a view through to how the proceeds of an individual bond are used, but we prefer to invest in the companies that we think are doing best.”
This means Aviva Investors looks at the issuer “first and foremost”, then considers the use of proceeds and how it links to a broader sustainability agenda. This requires drilling down into the details, bond by bond, company by company.
To illustrate this approach, Richard Butters, ESG Analyst at Aviva Investors, cited the case of a US-based supplier to the fracking industry. While the company is involved in improving water recycling rates in the industry – a heavy user of water – its link to the industry itself was problematic. “The company did not meet our broader sustainability outcomes; we had to offset the fact that the proceeds from the bond would improve the recycling rates in the industry with the fact that fracking contributes carbon emissions and is not aligned with the Paris Agreement.”
Analysis published this week by NN Investment Partners indicates scepticism in the market as to how sustainable sustainability-linked bonds are. To avoid the risk of “sustainability washing”, firms should assess a number of key performance indicators, said NN IP, including the company’s carbon neutral target, emission scopes, sustainability challenges of the company and whether the KPIs are independently verified.