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    Responsible investment in fixed income quarterly update

    Responsible investment in fixed income quarterly update

    April 29, 2021 Fixed income, Responsible investment

    Highlights

    • Impact bond issuance has outpaced 2020 as issuers look to finance a sustainable recovery from the COVID-19 pandemic
    • 2021 is on track for record issuance of impact bonds with $292bn issued in Q1
    • Only 38% of impact bonds Insight analyzed in Q1 2021 fully met our minimum sustainability requirements

    Many are calling for a ‘green recovery’ following the COVID-19 pandemic. Governments and issuers have used the impact bond market to finance this sustainable recovery, with many bonds issued at lower yields than conventional bonds, and 2021 is on track for record issuance with $292bn issued in Q1 alone.

    In the US, President Joe Biden has rolled back Trump-era environmental policies and has proposed significant spending on sustainable infrastructure.

    In Europe, demand for impact bonds remains high and the first sustainability-linked high yield bond was issued in Greece. Sovereign green bond issuance continued to expand, with the UK planning to issue a green government bond in Q3 2021.

    For more information on our approach to responsible investment, please visit our dedicated responsible investment page.


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    Regulatory and industry news

    • President Biden’s new stimulus bill includes plans to create millions of green jobs: The American Jobs Plan is a $2trn infrastructure and climate change bill designed to stimulate the economy and rebuild in a more sustainable manner. The proposed bill includes measures to support the manufacturing and charging network for electric vehicles. It will also seek to improve the sustainability and reliability of the American power grid and water supply. The Biden administration expects that the bill would support the creation of millions of jobs. However, it is unclear how much of the proposals will be approved by Congress.1

    • President Biden shifts US tone on climate issues: President Biden invited 40 world leaders to a virtual climate summit.2 The US made large commitments including a promise to curb carbon emissions by 50-52% below 2005 levels by 2030. President Biden stressed the environmental and economic imperative to limit global warming to 1.5C. In response, Chinese President Xi Jinping announced a reduction in reliance on coal and Brazilian President Jair Bolsonaro committed to carbon neutrality by 2050 and an end to illegal deforestation in the Amazon by 2030. However, there were some notable detractors including Japan which set less ambitious targets during the conference and Russian President Vladimir Putin who made no commitments. The conference came after other notable moves in the US on ESG issues: the US Department of Labor is rolling back ESG rules that required workplace pensions to solely consider financial factors for fund selections and proxy voting.3 Additionally, the SEC has launched an ESG climate enforcement task force to tackle ESG-related misconduct in companies, investment advisors and funds. The initial focus will be to identify companies which are materially misstating climate risks.4

    • European Union threatens trading partners with a carbon border tax: Frans Timmermans, an executive vice-president of the European Commission and leading work on the European Green Deal, said the bloc would not hesitate to establish a carbon border tax on imports from countries which have not committed to reaching net zero by 2050.5 This would protect European firms facing rising prices in the internal carbon trading system, and would be a significant step towards global carbon pricing despite pushback from EU trading partners.

    • Research shows demand for green bonds results in lower yields compared to conventional issuance: High demand for green bonds from investors looking for sustainable assets has led to a decrease in yields. A new study estimates that green bonds, on average may yield 15-20bp lower than similar conventional bonds.6 Strong demand appears to be driving price increases for these relatively scarce green assets. However, investors should exercise caution as the majority of issuance analyzed by Insight does not fully meet our expectations for sustainability criteria – see below.

    • Europe’s first sustainability-linked high yield bond issued: Public Power Corporation, a Greek state-backed utility company, raised €650m of debt. If the company fails to reduce its Scope 1 carbon emissions by 40% before the end of 2022 (using 2019 as a base), the coupon of the bond will increase by 50bp.7

    • The EU has updated and expanded its rules on sustainable finance: The EU has announced a package of measures to “help improve the flow of money towards sustainable activities” across the EU. Amendments to existing Delegated Acts require investment advisers to consider clients’ sustainability preferences and include clarification of investment firms’ fiduciary duties. A new Corporate Sustainability Reporting Directive aims to extend EU sustainability reporting requirements to all large, and all listed, companies, while a new EU Taxonomy Climate Delegated Act aims to identify economic activities that contribute the most to mitigating or adapting to climate change.8 The EU has also taken steps to simplify the reporting requirements for the Sustainable Finance Disclosure Regulation (SFDR).9

    • UK provides more detail on plan to issue green bonds10: We expect the first issuance in Q3, probably around August, with a second issuance by December. There will be a minimum of £15bn of issuance and possibly more as the DMO has an unallocated remit of £28bn. From the budget announcements and our meetings with the Debt Management Office (DMO), our understanding is that we should expect details of the green gilt framework in June. This will provide more detail on categories of projects that will be eligible under the green gilt program and other practical details, such as what happens to investors' money before it is invested to ensure it is not mixed with non-green gilt money. We expect the framework to be aligned with the International Capital Markets Association’s Green Bond Principles.

    • The UK sets ambitious carbon reduction targets: The UK’s government has set a target to reduce carbon emissions 78% compared to 1990 levels by 2035. The target was introduced in the UK’s sixth Carbon Budget, a legally binding restriction on the total amount of greenhouse gases the UK can emit over a set period. This move is a significant step towards the UK’s goal of achieving net zero by 2050. For the first time international aviation and shipping emissions will be included in the Carbon Budget. Prime Minister Boris Johnson said “the UK will be home to pioneering businesses, new technologies and green innovation as we make progress to net zero emissions, laying the foundations for decades of economic growth in a way that creates thousands of jobs”.11

    Another record year for impact bond issuance

    • Impact bond issuance has outpaced 2020 as issuers look to finance a sustainable recovery from the COVID-19 pandemic
    • 2021 is on track for record issuance of impact bonds with $292bn issued in Q1.
    • Only 38% of impact bonds Insight analyzed in Q1 2021 fully met our minimum sustainability requirements
    A note on responsible investment and impact bonds: Investing responsibly means taking all risks, including ESG risks, into account when designing a solution. Investing in impact bonds is one way to encourage a positive environmental or social impact with your investments, but we believe it is more effectively done when considered alongside other relevant ESG factors within the framework of a responsible investment policy and approach.


    Total issuance (USD) by sector and by year12

    Total issuance (USD) by sector and by year

     

    Total issuance (USD) by sector and by year


    Largest impact bond issues in Q1 202113

    Issuer Issue type Size of issue Bond type
    European Union (four issues) Supranational €37.9bn Social (pandemic)
    Caisse d'Amortissement de la Dette Sociale (four issues) Government agency €20.9bn Social
    Italy Buoni Poliennali Del Tesoro Government €10.1bn Green
    French Republic Government Bond OAT Government agency €8.2bn Green


    Insight impact bonds ratings in Q1 2021

    Our analysis of 24 impact bonds issued in Q1 2021 resulted in the following ratings:

    bonds were rated green, indicating the bond meets Insight’s minimum sustainability requirements
    bonds were rated amber, indicating there are weaknesses in the bond with regard to sustainability
    bonds were rated red, indicating the bond does not meet Insight’s minimum sustainability requirements

     

    Industry Bond type ESG performance met? Bond framework criteria met? Impact criteria met? Traffic light score
    Utilities Green Yes Yes Yes

    Analyst assessment: This issuance combines a sustainability-linked-bond structure with a use-of-proceeds structure, which is very favourable and strong compared to peers. The main area of focus is renewable energy, with two targets linked with the broader business strategy: if the issuer fails to achieve either goal, a 25bp increase in the coupon will apply midway through to the maturity of the bond. As one of the first combined use-of-proceeds and sustainability-linked structured bonds, we are very positive on this issue as it demonstrates accountability and transparency.

     

    Industry Bond type ESG performance met? Bond framework criteria met? Impact criteria met? Traffic light score
    Utilities Green Yes Yes No

    Analyst assessment: We have previously applied an amber rating to this issuer, and will maintain it for this issue. Our main concern with this bond is that one of the main uses of proceeds is a large scale hydroelectric power project, which can have a negative impact on biodiversity. The framework is in line with expectations and has not been updated.

     

    Industry Bond type ESG performance met? Bond framework criteria met? Impact criteria met? Traffic light score
    Utilities Green Yes No Yes

    Analyst assessment: While the issuer has described how it aligns with each pillar of the ICMA Green Bond Principles, there is no second-party verification, which is a market standard for green, social, and sustainability issuance. The main uses of proceeds are renewable energy and energy efficiency.

     


    1https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/

    2https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/26/president-biden-invites-40-world-leaders-to-leaders-summit-on-climate/

    3https://www.dol.gov/newsroom/releases/ebsa/ebsa20210310

    4https://www.sec.gov/news/press-release/2021-42

    5https://www.reuters.com/article/us-climate-change-eu-carbon-idUSKBN29N1R1

    6Löffler, K.U., Petreski, A. & Stephan, A. Drivers of green bond issuance and new evidence on the “greenium”. Eurasian Econ Rev 11, 1–24 (2021). https://doi.org/10.1007/s40822-020-00165-y

    7https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/ppc-increases-size-of-esg-linked-bond-deal-sets-final-yield-63126092

    8https://ec.europa.eu/commission/presscorner/detail/en/ip_21_1804

    9https://www.esma.europa.eu/press-news/esma-news/three-european-supervisory-authorities-publish-final-report-and-draft-rts

    10https://www.dmo.gov.uk/data/gilt-market/green-gilt-issuance/

    11https://www.gov.uk/government/news/uk-enshrines-new-target-in-law-to-slash-emissions-by-78-by-2035

    12Source: Insight Investment. Bloomberg data as at 31 March 2021.

    13Source: Bloomberg. Selected by Insight according to absolute value of local currency.

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