have also been developing in recent years. Fund managers also offer thematic green or social bond fund vehicles (e.g. the IFC/Amundi Planet Emerging Green One green bond fund for emerging markets, Threadneedle’s UK Social Bond Fund, AIM/ Lombard Odier Global Climate Bond Fund). Although growing in importance and recognized as a catalyst for the integration of ESG into fixed income portfolios, the labelled bond market is still tiny – less than 0.1% of the total global bond market. Green bonds Green Bonds are defined as fixed-income securities that raise capital to support projects or activities with specific climate or environmental sustainability purposes. Multilateral institutions like the European Investment Bank (EIB) and World Bank led the issuance in the green bond market. Green municipal, state and corporate green bonds followed, and high yield green bonds are starting to develop. Figure 6: Level of ESG Integration Source: Authors Labeled Bonds ESG ‘Holistic’ (in-house integration across all asset classes) ESG ‘Passive’ (via index) ESG ‘Active’ (mandate with specialist manager)
INCORPORATING ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) FACTORS INTO FIXED INCOME INVESTMENT | 33 There are four types of green bonds: standard recourse-to-the-issuer debt obligation, non- recourse-to-the-issuer debt obligation, green project bond and green securitized bond (covered, ABS, MBS etc.). Proceeds are most commonly allocated to renewable energy projects, such as wind farms, or cleaner forms of public transport. The labelled green bond market has taken off in recent years (Figure 7). In 2017, over $160 billion was issued, with over U$200 billion in green bonds already issued between 2007 and 2016 (World Bank). A further $700bn outstanding were unlabelled climate-aligned bonds. 28 The World Bank Treasury alone has issued USD $10.2 billion in 138 green bonds in 18 currencies. Despite the recent growth rates, green bonds only constitute a small fraction of the overall global bond market volume of $90 trillion, i.e. about ½%. There is an ongoing discussion about the definition of green bonds, and the setting of standards to facilitate credibility and transactions (Ehlers and Packer 2017). The voluntary “Green Bond Principles” (ICMA 2017a) are widely used. 29 The “Climate Bonds Standard and Certification Scheme” provides sector-specific eligibility criteria for assets and projects that can be used for climate bonds and green bonds (CBI 2016). Green bond assessments are undertaken by companies such as Sustainalytics, VigeoEiris and Oekom Research, Moodys, Cicero and Trucost (now part of S&P Dow Jones Indexes). As the popularity and interest in the green bond market rises, issuers are increasingly stretching the boundary of what qualifies as a green or social investment. There is also an on-going debate on whether ‘green’ projects from corporations with broader investment objectives should qualify – some viewing this as a positive sign of change within companies, others concerned that ‘green washing’ could reduce the credibility of the market as a whole.
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