LONDON AND WASHINGTON, D.C. – Issuance of global ESG-labelled bonds could reach USD4.5 trillion per year by 2025, according to new research by Pictet Asset Management and the Institute of International Finance.
Historically, ESG investing has been mostly focused on the equity markets, but with around USD4 trillion of capital required globally each year just to contain the threat of climate change, it is inevitable that more money will need to come from bond investors.
This silent revolution will take place in fixed income markets over the next 5-10 years. Encouragingly, as the report illustrates, the fixed income markets look to be up to the task.
Within these markets, debt securities that embed environmental and social considerations are in the ascendancy. Albeit from a low base, the sustainable bond market has been growing rapidly for several years while the variety of instruments it contains and the range of environmentally oriented activities it finances have expanded at a dizzying pace.
Green fixed income securities with specific use-of-proceeds requirements, sustainability-linked debt whose coupons are linked to the environmental performance of governments and corporations and social bonds are just some examples of the innovative structures vying to become mainstream investments in the next few years.
For investors, this transformation opens up new frontiers and brings fresh challenges. The opportunity now exists to create portfolios that can fulfil both financial and non-financial goals – the mitigation of climate change, the protection of biodiversity and tackling inequality have become possible through bond investments.
There are risks to consider too. Due to their complexity, ESG bonds can be costly to analyse, requiring far greater scrutiny than their conventional counterparts. Nor do they currently fit neatly into the portfolio construction frameworks investors tend to favour.
ESG-labelled bonds are also likely to become bigger features of emerging world sovereign and corporate debt markets. ESG-labelled bond issuance in emerging markets will increase from some USD50 billion per year in 2020 to USD360 billion by 2023, according to the Pictet/IIF report
Private capital is crucial to achieving the United Nations’ Sustainable Development Goals (SDGs) by 2030. The “SDG financing gap” – the difference between what emerging nations need and what they currently receive in investment – is estimated to be USD2.5 trillion per year.
At an estimated USD82 billion in 2020, the amount of climate-related investment channelled to the developing world accounted for less than 8 per cent of total cross-border capital flows into these countries. The development of ESG bonds could make a real difference; a fully-fledged sustainable debt market would provide emerging sovereigns and corporations with the capital they need.
Raymond Sagayam, CIO Fixed Income at Pictet Asset Management, said, “The development of ESG-labelled bonds is an area of the market we have been watching closely for some time. The analysis from IIF and Pictet Asset Management investment teams reaffirms our view that there is set to be a silent revolution in fixed income markets that will benefit investors, the environment and society.”
Sonja Gibbs, Managing Director and Head of Sustainable Finance at IIF, said, “By 2025, there will be few global investors who don't have a significant allocation to ESG and green investments. And if you look further ahead to 2050—when governments and companies around the world will be seeking to deliver on net-zero commitments—we will have effectively greened global bond markets, transforming our environment for the better.”
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About the Institute of International Finance
The IIF is the global association of the financial industry, with more than 400 members from more than 65 countries. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth. IIF members include commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks. To learn more about IIF, please visit www.iif.com, follow us on Twitter, LinkedIn or YouTube, or check out IIF’s podcasts.
About Pictet Asset Management & the Pictet Group
Pictet Asset Management includes all the operating subsidiaries and divisions of the Pictet group that carry out institutional asset management and fund management. Pictet Asset Management Limited is authorised and regulated by the UK’s Financial Conduct Authority.
At 30th September 2021, Pictet Asset Management managed USD273/CHF255/EUR236/GBP203) billion in assets. Pictet Asset Management has eighteen business development centres worldwide, extending from London, Brussels, Geneva, Frankfurt, Amsterdam, Luxembourg, Madrid, Milan, Paris and Zurich to Hong Kong, Taipei, Osaka, Tokyo, Singapore, Shanghai, Montreal and New York.
The Pictet Group is a partnership of owner-managers, with principles of succession and transmission of ownership that have remained unchanged since foundation in 1805. It offers only wealth management, asset management, alternative investments and related asset services. The Group does not engage in investment banking, nor does it extend commercial loans. With USD 746 (CHF 696 / EUR 644 / GBP 553) billion in assets under management or custody at 30th September 2021, Pictet is today one of the leading Europe-based independent wealth and asset managers.
Headquartered in Geneva, Switzerland and founded there, Pictet today employs over 5,000 people. It has 30 offices in: Amsterdam, Barcelona, Basel, Brussels, Dubai, Frankfurt, Geneva, Hong Kong, Lausanne, London, Luxembourg, Madrid, Milan, Monaco, Montreal, Munich, Nassau, New York, Osaka, Paris, Rome, Singapore, Shanghai, Stuttgart, Taipei, Tel Aviv, Tokyo, Turin, Verona and Zurich.