The impact bond market could grow to $2trn by the end of the year as record growth last year is likely to be repeated in 2021.
A review carried out by Insight Investment found a record $500bn was issued in impact bonds in 2020, an increase of 60% on the $313bn issued the year before. The review said this “could easily be repeated in 2021” taking the overall market close to $2trn.
The group’s research found of the $500bn issued in 2020, government-related issuance in response to the pandemic accounted for more than half of that at $260bn. Financial services added $121bn, leading the corporate sector and becoming the first group to exceed $100bn in annual issuance, while utilities also continued to grow impact issuance with an 18% increase on 2019 to $57bn. However, consumer staples and energy issued less than the previous year.
France had the highest issuance in terms of country with 18% of the overall total – almost twice that of the nearest countries Germany and the US. The UK had the 15th highest level of issuance but Insight pointed out this may gain impetus following the government’s recently announced plans to issue a green gilt.
Green bonds continued to dominate impact bond issuance with 53% of the overall total but Insight noted the rise of social bonds had been “striking” with a nine-fold increase to $161bn in issuance from just $18bn in 2019, largely driven by the global response to Covid-19.
The group said it anticipates a similar amount of impact bond issuance this year but with a different make-up; for example, there may be less social issuance but increases in sovereign debt and corporate sector issuance.
Insight Investment’s head of responsible investment research and stewardship Joshua Kendall commented: “More broadly, fixed income investors might consider the extent to which they are acting to influence the structure of new issuance. Corporates can be receptive to direct engagement and feedback. Also, for asset owners such as pension funds, the nature of fixed income investing requires the long-term management of sustainability issues. There is great opportunity to incorporate impact objectives within mandates.”
However, Kendall also warned investors to do their research to protect against greenwashing or impact-washing.
“Impact bonds can help the investors align with their non-financial objectives, but rigorous due diligence is vital,” he said.
“In 2020, approximately 10% of impact bonds evaluated by Insight received a ‘red’ score and 40% a ‘green’ score.”