Capitalism Could Be Helpful in ESG Bond Market

Capitalism and environmental, social, and governance (ESG) principles don’t have to be opposing forces. In fact, some experts suggest that capitalism is already making helpful inroads in the fast-growing green bond arena.

That could prove meaningful to fixed income investors desiring the perks of ESG because, for the time being, there are lumps and lack of uniformity when it comes to ESG reporting and ESG ratings applied to green bonds. Capitalism can work through those issues, potentially giving investors more insight to the benefits of exchange traded funds such as the SPDR Nuveen Municipal Bond ESG ETF (MBNE).

The actively managed MBNE has some advantages, namely the point that the municipal bond market is fertile territory for elevated green bond issuance in the future as more cities and states look to raise capital for renewable energy projects. MBNE’s focus on municipal debt can also allay some of the greenwashing concerns that accompany investing in ESG bonds, which are still young relative to the broader fixed income market.

Researchers at the UCLA Anderson School note that there are benefits to issues and investors when bonds credibly meet ESG qualifications.

“A lesser-known ESG debt angle occurs when firms that are borrowing for any reason negotiate a standard loan that then has some ESG kickers added in. For instance, if the borrower meets certain agreed-upon ESG benchmarks, the loan’s interest rate might be eligible for a reduction,” according to the UCLA research team.

Sustainability-linked loans (SLLs) also have applications in the corporate world, underscoring the relevancy of the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND). RBND, which holds investment-grade corporate bonds, is relevant in this conversation because issuers of SLLs have a tendency to be transparent from the start without prodding from regulators.

“The researchers found that nearly 39% of the sample qualified good COVID-19-related ESG performance and 21% reported bad ESG news. In particular, SLL borrowers are more forthcoming than the ‘control’ firm each SLL borrower was matched against. Caskey and Chang found that SLL borrowers were 22.7% more likely to attribute good ESG performance to the pandemic, and 21.5% more likely to report bad news,” added UCLA.

SLLs are important because until more ESG reporting standards permeate the bond market, some self-policing is warranted.

“As we wait for more robust mandatory reporting to come online to address greenwashing, it’s an interesting insight on how the SLL slice of the capital market may be serving as a modest sheriff of sort,” concluded UCLA.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.