Green, Social and Sustainability Bonds Q&A Part Two: Social impact investing and beyond
Sustainable bonds (the collective term for green, social and sustainability bonds) is a growing asset class that has become a by-word for impact investing in a fixed income portfolio. As interest in this asset class continues to increase, so does the need for understanding the nuances behind them.
In part one we discussed green bonds, now we want to share some questions we are being asked about social, sustainability bonds and how AXA IM helps power the transition to a sustainable economy.
1. What should an investor think about when looking for a positive social impact strategy?
Social bond issuance, like green bonds, should follow certain criteria: they need to provide high levels of transparency and clear outcomes that could be measured by relevant key performance indicators (KPIs) throughout the project. Unfortunately, the level and quality of such criteria varies which is why having a thorough understanding of the project and regular communication with the issuer is important when building a positive social impact strategy.
At AXA IM, we only invest in social & sustainability bonds that have been validated by our proprietary sustainable bond framework. We believe this framework helps ensure that only those issuers with a credible sustainable strategy that provides a transparent and measurable impact are selected.
While the number of social bonds issuers has increased over the past few years, it is not a large market yet. Therefore, in order to have a more diversified positive social impact strategy, it is important to look beyond social bonds. Sustainability bonds and conventional bonds from issuers that have high Environment, Social and Governance (ESG) standards, and contribute positively to social UN Sustainable Development Goals, are two sources of investments that we see as providing this diversification.
By broadening the universe in this way, a positive social impact bond strategy aims to meet its objective of impact credibility while also boosting liquidity, diversification, and yield.
2. Sustainability bonds are still quite new, what should I know about them?
Not to be confused with sustainability-linked bonds, whose aims are tied to their climate promises by imposing higher coupon payments if they miss targets, sustainability bonds finance or re-finance projects that are a combination of green and social initiatives.
As certain green projects may have social co-benefits and, similarly, certain social bonds may have some green co-benefits, this classification of “sustainability bonds” help issuers position their projects as accurately as possible. Sustainability bonds follow similar best practice guidelines to that of green and social bonds in that they should provide transparent KPIs and be outcome driven.
While this sub-asset class is growing steadily with $507bn AUM1 and increasing diversification in terms of sectors, we think sustainability bonds are still best considered as part of a broader sustainable bond portfolio.
3. How do you power the transition to a sustainable economy in a relevant and effective way?
There are three main ways that we look to stay relevant and remain one of the sustainable bond investment market leaders:
A more conservative sustainable bond framework
Our sustainable bond framework provides a robust process to define and monitor eligible green, social and sustainability bonds. This framework sits within our broader fixed income process and encompasses more than just environment, social and governance integration. Through this proprietary sustainable bond framework we aim to provide a conservative bond selection for investors where only sustainable bonds with credible projects that can provide measurable impacts are included.
While the framework is central to our decision-making process, we believe that engaging with issuers is also a key part to a successful process. Through our dedicated Responsible Investing analysts, we engage with around 60 green, social and sustainable bond (GSS) issuers per annum and set out a process with issuers to ensure that any actions are followed up and progressed. This allows us to ensure the engagement remains up-to-date and the issuer is still doing what they said they would do.
For example, in 2022 we met with 54 issuers. Beyond alignment with the recommendations of the International Capital Market Association’s Green Bond Principles, our main area of focus was to discuss alignment with issuers’ sustainability strategies and forward-looking ambitions. We have seen some positive outcomes with an increasing number of issuers establishing concrete Environment, Social and Governance (ESG) objectives. On the other hand, given our higher expectations, poor ESG profiles and ambitions of certain issuers were a significant factor in deciding that some GSS issuance was not eligible in 2022.
Another discussion we had with GSS issuers was about how they integrate the EU Taxonomy’s principle of “do no significant harm” (DNSH) and minimum social safeguards (MSS). While we see more and more issuers aligning with the Taxonomy’s technical criteria, the picture is very different when it comes to DNSH and MSS. Issuers are struggling to find a proper way to integrate these – which is understandable given the absence of a comprehensive and recognised definition of these criteria. This will be one of our engagement priorities with GSS issuers in 2023
Driving the sustainable bond market evolution
We believe that as an experienced responsible investment manager with one of the longest green bond strategy track records, we should offer this expertise to the wider market to help build a healthy sustainable bond market. We do this in different ways such as membership to industry groups and by providing guidance to issuers, as described above. We also have regular discussions with underwriting banks. We often have these kinds of discussions to share our eligibility criteria for GSS, our views on specific deals or our broader ESG expectations for issuers. We believe it is a very effective way to spread our views and expectations across the market, as banks can share our thoughts with their broad base of clients on the issuers’ side. We believe these interactions assist in overall better practises for the environment and investors.