What Are The Best ESG Bonds?

When you think of ESG investing—that would be environmental, social and governance—it’s often about how the movement is affecting stock prices.

This concept involves a complex mix of investors:  public pension funds and college endowments (a number of whom want to divest oil and gas stocks), investors looking for other alternatives than stocks and bonds, plus traditional types who fear that ESG ignores earnings potential.

But too few look at bonds through an ESG lens. And let’s face it, bonds are, or usually are, stalwart performers that seldom suffer the price swings that stocks do, and some of them offer decent yields. Assuming that interest rates will be rising, their yields should, as well.

Then the question is: what are the best bonds from an ESG perspective? SMBC Nikko Trading just did a survey of 136 fixed-income investors globally and found some fascinating results. “A lot of demand on ESG is coming from retail investors,” said Doug Conn, executive director at SMBC, a global issuer of green bonds.

Like: ESG is a big deal in corporate America. Some 45% of respondents either incorporate ESG factors in their credit or internal risk rating, or use ESG metrics as a key part of their decision-making process. 

Green bonds are universally rated as the most “invested” ESG asset class (33%). These raise money for renewable energy, energy efficiency, clean transportation, green buildings, wastewater management and climate change adaptions.

Social bonds (21%) are focused on food security and sustainable food systems, socioeconomic advancement, affordable housing, access to essential services, and affordable basic infrastructure. Sustainability bonds (22%) are a catch-all, and often refinance these other two categories.

Getting good data on ESG investing is rated a challenge by 22% of them. It can be tough to find a company, for instance, that is truly good for the environment, or otherwise treats people well and governs without cronyism.

There’s a lot of “greenwashing” going on, where a company will make moves that really are just a public relations cover for the nasty stuff they continue to do. Right now, several firms have produced metrics to gauge ESG mindedness, but some of them are quite different and leave investors puzzled.

In judging possible companies to invest in, a lot of flexibility exists. Only 15% of respondents have completely disinvested from industries they believe to be controversial. What do they consider to be the most ESG-friendly industries then? Tech is the leader, with 25% of respondents naming it. Then comes banking/finance (14%), real estate (7%), pharma/healthcare (6%) and retail (6%).

People often think of stocks when investing in companies. But many businesses use bonds to raise the capital they need, so they deserve a good look from ESG-oriented investors. “ESG is getting a lot of attention on the fixed-income side,” Conn says.