Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
The green and social bond market continues to grow, evolve and diversify, remaining a helpful tool in driving sustainability. In the following Q&A with Saida Eggerstedt, Head of Sustainable Credit at Schroders, we look at what this means for investors, considering recent market developments and their implications.
Given the inhospitable market conditions, was it easier to issue green bonds because of the strength of ESG industry trends?
Yes and no. Let us not forget that ESG investors actually ask more questions, or at least they should be, about issuers’ environmental, as well as financial metrics, while buying ESG bonds. This means the issuers need extra resources and commitment, and a good plan in place for sustainability.
Central bank actions have brought many corporate bond issuers to market this year, across the board, as companies sought to ensure they had sufficient capital as operations were hit by lockdowns. Selective issuers have used their green or social or sustainability bond issuance to emphasize their environmental and social initiatives, partly as they reassess their responsibilities in the new world, with the pandemic underlining many of the world’s vulnerabilities.
Assessing these bonds from an ESG as well as purely financial perspective gives greater understanding and conviction, positive or negative, in otherwise volatile and uncertain markets.
Have you observed any reduction or variance in quality of the new ESG bond issuance? Has the increase in ESG issuance created opportunities?
Opportunities for sure: for investors, but also for society, given the clear drive among businesses to improve energy efficiency and reduce carbon emissions, and issuers committing to all stakeholders. We do not want to pay too much added premium for ESG bonds, unless we think through improved sustainability the overall sustainability-adjusted credit profile improves for good.
It helps sustainable credit investors to create impact on one hand by engaging with issuers and on the other by investing in various SDGs and social and climate causes through an increasingly public and liquid ESG Bond market.
How do we measure, assess and analyse the credentials or structure of a green or social bond, and ensure proceeds are being used in the right way?
For us it is important to also assess the overall culture, strategy and direction of any green or social bond issuers. You can then think of the ESG bond as a way of enforcing financial as well as management commitment. Our team of credit-cum-ESG analysts and portfolio managers look at various company metrics and use of proceeds, including carbon intensity reduction and avoided carbon emissions, hospital beds and social/healthcare facilities created, or the number of students helped. Ideally the proceeds are focused on new development, but with some allowance for a lookback period with a maximum of up to three years.
In addition to quantitative and qualitative annual reporting on the ESG bond itself, sustainability reports and increasingly the Task Force on Climate-related Financial Disclosures (TCFD) reporting, as well as regular issuers meetings and sector specific ESG analysis are highlights.
What is your view on more prescriptive measures, such as segregated accounts for ESG bond proceeds?
I think those types of measures represent the ideal, but are not always realistic or practical, and they are not essential. Of equally, if not greater importance, is the greenness or the positive social impact of the use of proceeds, which is best monitored through engagement.
A separate account might tick a box for auditors, but it can be onerous, creating an administrative burden. It’s more important that the ESG bond is not just a one-time venture; it should be part of the adoption of greener or more socially-minded policies and activities consistent with a new orientation on a larger scale.
What are we seeing in terms of trends or developments in ‘Use of Proceeds’, and what is it telling us about companies’ key ESG considerations and priorities?
Overall we see companies thinking bigger, and expanding their ESG horizons. Green considerations are not just about a company itself, but are about aligning with the goals of the Paris agreement. The issue of green buildings has been a success story, particularly around certification of new buildings; it is now widening to energy efficient renovation and its role in a circular economy, including waste and water management. Social was often about affordable housing, but it is now incorporating access to education and medicine. A responsible issuer looks at inclusion in its business from racial, gender, income, as well as mental and physical capability, and issues a social or sustainable bond for this purpose. We have seen early moves here.
Click here to learn more about ESG integration as well as the tools that can help evaluate how sustainable portfolios are.
The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal.
Investment involves risks. This material is issued by Schroder Investment Management (Hong Kong) Limited and has not been reviewed by the SFC.
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