Reaching for global impact bonds

While a perfect storm of performance issues has slowed appetite for sustainable equities during the past 12 months, more and more investors are opting for fixed income with an ESG focus

This year has been extremely challenging for fixed income investors who have experienced significant losses in their investments and haven’t enjoyed the diversification benefits of low correlation to equities the asset class typically provides.

Within fixed income strategies, sustainable or mainstream, the main driver of returns has been the big move up in interest rates, triggered by central bank intervention in their crusade to combat high inflation.

Meanwhile, in equity markets there has been a style rotation that has penalised sustainable investments due to their typical growth factor bias. These performance issues have significantly slowed investor appetite for sustainable investments in the equity space.

In contrast, the interest for sustainable fixed income strategies has continued and indeed we have seen a plethora of new strategies.

These have come in various flavours and forms, from existing strategies that have adapted their investment guidelines to include specific sector exclusions and a positive tilt to ESG factors, to the launch of new strategies with sustainable objectives or some with a more defined impact approach.

Within the impact space, initially the focus was on strategies focused on environmental issues and climate change. However, following the pandemic, there has been a significant growth of social bond issuance and we are seeing a corresponding rise in both dedicated social bond funds and impact bonds with a diversified approach, which incorporates both social and environmental solutions.

Read the full article in ESG Clarity’s November 2022 digital magazine.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...