We explore the importance of establishing a robust framework to assess the suitability of labelled issuance for our portfolios and highlight how we can use our engagement edge to combat greenwashing.
Labelled bonds at a glance
With their key performance indicators (KPIs) and use of proceeds (UoP) outlined at issuance, green, social and sustainable bonds allow investors to target social and environmental objectives through their fixed income allocations, complementing traditional fixed income securities within an impact portfolio.
We have also identified some secondary benefits which we feel further enhance the appeal of UoP bonds:
- Transparency: after issuance of green, social or sustainable debt, issuers report on the exact projects to which proceeds were allocated, the amounts, the impact and achievement (or not) of targets. This helps us to verify, measure and report on the impact our investments have.
- Downside protection: in some periods of volatility, UoP bonds have not sold off as quickly as their non-green counterparts. While this may lead to a pronounced green premium in the secondary market, it highlights the potential for green bonds to exhibit stickier characteristics and offer more stable returns in periods of market stress.
SLBs allow issuers to raise finance without ring-fencing the proceeds for a social or environmental project. Instead, they tie the future coupon payment to a sustainability performance target (SPT) which measures improvements in the borrower’s sustainability profile — for example, an overall reduction in greenhouse gas emissions associated with products manufactured. Some issuers have faced criticism for SLBs that lack robustness or incentive to allocate the proceeds with sustainable objectives in mind.
Nevertheless, we see a place for robust SLBs within our portfolios. We have identified some secondary characteristics enhancing their appeal:
- Accountability: SLBs offer an alternative mechanism for companies to prove their commitment to sustainability. With coupon payments tied to the achievement of a target, SLBs impose a direct financial penalty on the issuer if their target is not met.
- Flexibility: SLBs give issuers greater flexibility than UoP bonds. They allow more types of issuers — including those whose products/services don’t have a direct social or environmental impact — to enter the sustainable debt market and thereby facilitate a larger collective effort towards increasing the sustainability of more issuers’ operations.
Building a framework
We recognise that labelled bonds are a useful part of the public debt market toolkit in the pursuit of generating impact. We have developed a labelled bond framework which aims to ensure we stay true to our commitment to high-integrity impact investing and combatting greenwashing. Below, we outline our best practices: