Advisers say brown bond market will go green

Aviva Investors survey finds client demand means more than half of advisers think market will be completely green.

More than half of financial advisers believe green bonds will replace the conventional bond market, due in part to rising interest from clients.

An Aviva Investors survey of 100 advisers has found 62% believe the brown bond market will turn completely green, with 3% expecting this by 2025, 35% by 2030 and 24% by 2040 or later. Just less than half (43%) say they are seeing an increase in demand in these bonds from clients.

Green bond funds assets in Europe reached $25bn at the end of Q1 2021 with 82% of assets represented by active funds and the rest by passive ones, Morningstar recently told ESG Clarity.

Growth in assets has accelerated over the past three years with inflows of $4.7bn in 2019, $10bn in 2020 and $2.7bn in Q1 2021. Although green bond funds still represent only 0.2% of total global assets in fixed income investment funds, investor interest in green bond funds has grown substantially, it said.

Two-thirds of advisers surveyed by Aviva Investors (67%) believe sustainability-linked bonds are the most likely vehicles to be used to meet client demand.

Sustainability-linked bonds are popular because issuers are tied to specific outcomes rather than a simple expenditure goal, Paul Lukaszewski, head of corporate debt – Asia Pacific, Aberdeen Standard Investments, recently told ESG Clarity. This, in theory, more closely aligns the interests of borrowers with those of investors who want a clearer idea of the positive effects of their capital.

However, the qualitative nature of the framework with which they must align poses problems, Lukaszewski continued. Issuers can sometimes have the option to redeem the bonds early and avoid paying a financial penalty.

Advisers surveyed by Aviva Investors also see some barriers to their clients investing in ESG-linked bonds. The greatest such obstacle is a lack of education and understanding about these instruments, which was cited by 54%. For the wider ESG bond universe, other factors include a lack of standardisation or transparency (31%) and a lack of interest owing to ESG criteria being regarded as a short-term fad (17%).

Apiramy Jeyarajah, head of UK wholesale at Aviva Investors, said: “The business and investment case for responsible investment is hard to dispute these days, but with a wide variety of instruments coming to market, advisers must take a holistic view of the companies that are issuing them.”