According to global investment firm JP Morgan, sustainability bonds could grow into a $150 billion market.
Despite the pandemic, ESG investing took off as more investors sought to allocate more capital into the social issues they cared about. The MSCI ACWI ESG Focus index ballooned to 60% within the last 12 months and 37% within the last three years.
Now, sustainability-linked bonds are coming into the limelight in ESG investment circles. These bonds act like traditional bonds in that they are used as financing tools for the issuer, but the focus is different.
“But sustainability-linked bonds (SLB) allow firms to raise money for general corporate purposes while promising investors that if they do not meet the sustainability targets set — such as cutting carbon emissions — they will pay investors extra,” a Reuters article explained.
JP Morgan says that SLBs serve as an effective method to raise capital in order to finance broad-based ESG initiatives as opposed to zeroing in on one particular goal. It’s still a relatively new concept, but one that could gain more traction as more of these products get introduced to the market.
“I’m calling for the SLB market to grow to around $120 to $150 billion since market inception, and I expect we’ll get that this year,” Marilyn Ceci, global head of ESG developed capital markets (DCM) at JP Morgan.
Ceci also noted that year-to-date volumes stand around $6.9 billion.
“I get calls from investors more and more saying that they want more SLBs, they like the holistic approach, and they like the skin in the game.”
ESG Passing the Stress Test
Covid-19 was the first major roadblock for ESG investing, and it passed with flying colors. Despite a rough 2020, capital inflows into ESG funds were resilient for the most part, and they even outperformed the broader market.
“This was the first stress test for ESG investing and one of the criticisms historically had been that ESG investing hadn’t been through a full business cycle for us to understand if it was nice to have, or it was really meaningfully decreasing risk and adding alpha,” said Neha Coulon, global head of ESG solutions at JPMorgan.
In a three-year time frame, the S&P 500 ESG Index is ahead of the broader index by about 7%. That outperformance continued after the March sell-offs in 2020.
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