Fixed income impact investing: Growth, evolution, opportunity

The time is now for impact investing

Will Prentis, Investment Analyst
Paul Skinner, Investment Director

Recent events highlight the mounting challenges facing society. From the pandemic, which underscored the widespread need for improved health care and internet access; to the ambitious goals set at the UN Climate Change Conference (COP26); to Russia’s tragic invasion of Ukraine, which has led to a cascade of social and environmental problems and a sharpened focus on cybersecurity and renewable energy.

As the world’s large challenges mount, investors are seeking ways to make a difference, increasingly turning to public markets as a means of using their capital to “do good”. With impact investing, investors can participate in a market that offers the potential for long-term growth, competitive investment returns, and opportunities to create positive real-world change. 

In public fixed income markets, our impact universe includes traditional issuers addressing critical needs through their core products and services and a subset of “sustainable debt” issuance, including green bonds, social bonds, sustainable bonds, and sustainability-linked bonds. This market is expanding quickly, as is the flow of capital targeting solutions for these needs.

At Wellington, we take a non-concessionary approach, aiming to maximise impact and deliver competitive investment returns for our clients. In our view, selectively investing in what we believe are strong companies that stand out as addressing impact themes offers compelling return opportunities. Increasingly, market participants are recognising issuers that are developing differentiated solutions for social and environmental needs. We expect demand for these issuers to increase and for impact issuers to benefit from structural tailwinds, given their focus on essential products and services that address some of the world’s most pressing issues.

We believe public fixed income markets offer many opportunities for investors to generate widespread impact. Working with an experienced investment manager with an established impact platform, deep research capabilities, and an extensive fixed income background may be a sensible solution for investors looking to harness today’s impact momentum and generate positive real-world change through their investments.

A developing universe: where we see expanding opportunities

Campe Goodman, CFA

The fixed income impact opportunity set is evolving rapidly as governments, issuers, and investors acknowledge the need to actively support a sustainable future. We continue to identify compelling opportunities across a range of issuer and issue types in both developed and emerging markets. While the majority of issuance meeting our impact criteria has, thus far, come from developed markets, we are seeing substantial growth in opportunities within emerging markets, where unmet needs are generally more widespread than in developed markets.

Across markets, we believe impact investments can play a key role in closing the funding gap for the United Nations Sustainable Development Goals, facilitating the low-carbon transition, and building resilience to the physical risks of climate change. As governments and consumers, particularly in emerging markets, intensify their focus on quality of life and sustainable development, we expect more companies to offer solutions that address unmet needs and for sustainable debt and traditional issuance from impact issuers to see accelerating demand growth.

Figure 1 illustrates the recent growth in sustainable debt issuance in emerging markets. While green bond issuance remains strong, new growth drivers have expanded the opportunity set. In the sustainable debt space, sovereigns and high-yield corporate issuers are entering the market via social, sustainable and sustainability-linked bonds.

Figure 1

The fixed income impact universe has improved in quality as well as quantity. Better standards and regulation and the participation of committed market participants have contributed to that evolution. Large institutional investors like Wellington can engage with issuers and provide guidance on how to structure robust bond deals. We also believe in 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.

The means through which we can generate positive impact have never been so diverse. Looking ahead, we are excited by the many opportunities that enable us to supply capital for real-world change through fixed income impact investments.

Engagement: holding issuers to account

Virginie Pelle, Fixed Income Credit Analyst

As fixed income impact investors, we believe it is crucial to engage with the issuers held in our portfolios. Engagement enables us to identify and assess investment risks and opportunities while also helping to ensure that issuers generate meaningful impact year after year. As Figure 2 shows, in our engagements, we have four key priorities.

Figure 2