Funds that buy debt designed to help society grew at a faster pace in the first half of the year than those that buy sustainable equity.
The COVID-19 pandemic has fueled demand for funds globally that invest in any sort of asset that can make the world better and fight the disease, according to Hortense Bioy, director of sustainability research for Europe, the Middle East, Africa, and Asia Pacific at Morningstar. Many investors are drawn to fixed-income funds in particular because bonds and loans can be clearly tied to projects with environmental, social or governance aims, while equity can be harder to track that way, she said.
From January through June, funds that buy debt funding environmental, social, and governance matters grew 12% from the end of 2019 globally, reaching a record $209.5 billion of assets, according to data from Morningstar. That compares with 10% growth for similar equity funds, which reached $660.7 billion in the same period.
Global sustainable fixed-income assets could reach $260 billion to $280 billion globally by the end of the year, while sustainable equity fund assets could total $730 billion to $750 billion globally, Bioy said. Europe, which has stronger regulations for sustainable investing, accounted for most of the inflows to debt and equity funds.
“Assets in ESG fixed-income funds have been growing in the past few years and we expect an upward growth trend in the medium to long term,” said Bioy in a telephone interview on Sept. 2. “The momentum is there and there’s demand for ESG bonds across the board.”
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Inflows are fueling more demand for sustainable debt. Investors placed almost $40 billion in orders for Alphabet Inc.’s record $5.75 billion sustainable bond sale last month. Sales of debt for projects aimed at helping society surged to a record 376% to 41.9 billion in the first half of the year from the same period a year ago, according to BloombergNEF.
The ESG bond industry is still working out kinks with the products. Data for the assets isn’t sufficiently standardized and depends on voluntary disclosures from borrowers. The Global Investors for Sustainable Development Alliance, which comprises of 30 chief executive officers from prominent corporations around the globe, endorsed making sustainability reporting on relevant ESG topics mandatory for financial and non-financial institutions in a report last month. Bloomberg LP, the parent of Bloomberg News, also provides ESG data, analysis and indexes.
Until that happens, it will be hard for fixed-income ESG funds to grow significantly, said Jay Collins, vice chairman of banking, capital markets and advisory at Citigroup Inc., who led the committee that wrote the alliance’s report.
“The noise around the data doesn’t give what investors need most, which is consistent, comparable disclosure data,” Collins said.
But as more tools like benchmark indexes and consistent data become available to investors, fund managers will build more sustainable investment portfolios, according to Andrew Lee, head of sustainable and impact investing at UBS Global Wealth Management.
“You will continue to see launches in the fixed income space and the overall assets under management allocated to sustainable fixed income continue to increase,” Lee said.