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Investors invested $ 54 billion in bond funds specializing in environmental, social and governance issues during the first five months of 2021, even as concerns about potential “greenwashing” intensified.
After several years of bumper sales of equity products that focus on ESG, investors are now focusing their attention on fixed income funds, according to figures compiled by Morningstar, the data provider.
In total, sales of all ESG bond funds reached $ 54 billion a year through the end of May, compared to nearly $ 68 billion for the whole of 2020. The data covers free capital funds. and funds traded in exchange around the world.
Assets under product management increased 14% to $ 374 billion between January and May, while they have nearly tripled in three years. In 2020 alone, assets increased by 66%, compared to a 12% increase in assets across the universe of fixed income funds.
Growing demand has spurred new fund launches, while companies and governments have revealed strips of social and environmental bonds to take advantage of the trend. But rising interest has raised concerns about so-called greenwashing, including fears that some bond funds may not be as sustainable as they claim to be and that fund managers will have difficulty deciphering their ESG credentials.
Jose Garcia-Zarate, associate director of Morningstar, said “there is a clear trend in favor of ESG growth, especially in Europe,” but many fund managers are struggling with “how to apply the principles of ESG in certain bond markets “. He said trying to label government bonds with ESG criteria had proved “very, very complicated” as “there is still no consensus on how governments and countries should be classified”.
Demand for ESG bond funds is concentrated in Europe, but other regions are beginning to see interest, Garcia-Zarate said. In the United States, ESG bond fund sales stood at $ 4.752 billion in the first five months of 2021, compared to $ 5.92 million for the past year as a whole.
There is also a growing demand for passively managed ESG bond funds, which typically track indexes. More than $ 17 billion has been invested in these products this year, surpassing last year’s record of $ 15.6 billion, according to Morningstar.
Colin Purdie, director of investment for Liquid Markets at Aviva Investors, which recently launched a bond fund focused on climate transition, said: we are seeing the background releases ”.
Morningstar data shows that 122 new ESG bond funds were launched last year, with 44 new offers in the first quarter of 2021.
But Purdie added that there were challenges for fixed-income investors when it comes to ESG: “There’s the view that ESG is easier on equities and one reason for that is because of the data,” he said.
In areas such as high yield or emerging markets, which are typically considered more speculative investments, data disclosure around ESG remains a problem. “There is a higher credit resource requirement to make sure you have the information you need,” he said.
Despite this, issuers have been competing in the market with new sustainable debt. BloombergNEF data show that $ 245.3 billion in green bonds, $ 83.8 billion in sustainability bonds and $ 129.2 billion in social bonds have been issued this year. In contrast, in the five months to the end of May 2020, $ 91.44 million was issued in green bonds and a further $ 15.21 million in sustainability bonds and $ 27.87 million in social bonds.
Bryn Jones, who runs the Rathbone Ethical Bond fund, one of the oldest and largest ESG fixed income funds, said there has been a “huge increase in supply” of green and social bonds during its 17 years of fund management.
He said demand for ESG bond funds was driven by a combination of regulations, such as efforts in the UK to get pension funds to take into account the impact of ESG on investments, as well as new cohorts of investors, such as millennials and younger investors who are interested in seeing their money do well and generate returns.
Despite the rapid increase in demand for ESG bond funds, they still account for less than one-fifth of sustainable fund assets, according to Morningstar.
A survey of Nordic and Dutch investors by NN Investment Partners in May found that nearly half of respondents say green bonds are their preferred fixed-income option. 81% of Nordic and Dutch pensions said they were already investing in green bonds.
But respondents also expressed concern about the eco-washing of businesses, saying this was the biggest barrier to investment.
Simon Bond, managing director of investment portfolio management at Columbia Threadneedle Investments, said that while there have been some cases in which issuers have been charged, the problem was not widespread. But Bond added that growing attention to greenwashing was positive.
“It simply came to our notice then. A light shines in that dark corner. It’s quite difficult to hide when this light shines in this corner of ESG, ”he said.
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