Sustainability Bonds Could Hit $150 Billion by Year’s End

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In line with international funding agency JP Morgan, sustainability bonds may develop right into a $150 billion market.

Regardless of the pandemic, ESG investing took off as extra traders sought to allocate extra capital into the social points they cared about. The MSCI ACWI ESG Focus index ballooned to 60% inside the final 12 months and 37% inside the final three years.

Now, sustainability-linked bonds are coming into the limelight in ESG funding circles. These bonds act like conventional bonds in that they’re used as financing instruments for the issuer, however the focus is completely different.

“However sustainability-linked bonds (SLB) enable corporations to boost cash for normal company functions whereas promising traders that if they don’t meet the sustainability targets set — equivalent to slicing carbon emissions — they’ll pay traders further,” a Reuters article defined.

JP Morgan says that SLBs function an efficient methodology to boost capital as a way to finance broad-based ESG initiatives versus zeroing in on one explicit objective. It’s nonetheless a comparatively new idea, however one that would acquire extra traction as extra of those merchandise get launched to the market.

“I’m calling for the SLB market to develop to round $120 to $150 billion since market inception, and I anticipate we’ll get that this 12 months,” Marilyn Ceci, international head of ESG developed capital markets (DCM) at JP Morgan.

Ceci additionally famous that year-to-date volumes stand round $6.9 billion.

“I get calls from traders increasingly saying that they need extra SLBs, they just like the holistic method, and so they just like the pores and skin within the sport.”

ESG Passing the Stress Check

Covid-19 was the primary main roadblock for ESG investing, and it handed with flying colours. Regardless of a tough 2020, capital inflows into ESG funds had been resilient for probably the most half, and so they even outperformed the broader market.

“This was the primary stress check for ESG investing and one of many criticisms traditionally had been that ESG investing hadn’t been by way of a full enterprise cycle for us to grasp if it was good to have, or it was actually meaningfully lowering danger and including alpha,” mentioned Neha Coulon, international head of ESG options at JPMorgan.

In a three-year timeframe, the S&P 500 ESG Index is forward of the broader index by about 7%. That outperformance continued after the March sell-offs in 2020.