The market for impact bonds is increasingly diverse but many of the instruments coming to market fall short of the minimum standards for sustainability set by Insight Investment, a leading global asset and risk manager. So far in 2019, Insight has marked 10 green bonds as red on its proprietary rating scheme, up from just one marked red in 2018.
Estimates suggest that achieving the United Nation’s Sustainable Development Goals will require US$5trn to US$7trn of total investment by 20301. Impact bonds – where proceeds are used for positive environment or social themes – are expected to be instrumental in reaching this target. But there is a pressing need for greater alignment between the objectives of these bonds and the strategic interests of the entities issuing them, says Insight.
“Too many impact bonds are simply bolt-on sustainability programmes, quite separate to the ongoing activities of their issuers’ day to day businesses,” said Josh Kendall, senior ESG analyst at Insight Investment. “It prompts the question; how authentic are these bonds? We want to reach a point where there is no distinction between a bond’s impact objectives and its issuer’s core operational activities.”
Insight’s analysts assign a traffic light score to impact bonds, denoting suitability for inclusion in credit portfolios. Red can indicate a variety of concerns, but most commonly around transparency on how proceeds will make an environmental difference. Issuance continues to be dominated by governments, financials and utilities but there is increasing diversity; three telecommunications companies issued impact bonds in 2019 and were oversubscribed.
“Increased diversity is positive but impact initiatives in sectors such as utilities may ultimately effect greater change because they achieve efficiencies in more carbon intensive industries. Our focus for assessing the value of these bonds is the alignment with the issuer’s core business and a commitment to quantitative, transparent reporting on the bond’s impact.”
Insight’s annual responsible investment report, Putting Principles into Practice, is available here.
More information about Insight Investment can be found at: www.insightinvestment.com
2 As of 31 March 2019. Assets under management (AUM) are represented by the value of cash securities and other economic exposure managed for clients. Reflects the AUM of Insight, the corporate brand for certain companies operated by Insight Investment Management Limited (IIML). Insight includes, among others, Insight Investment Management (Global) Limited (IIMG), Insight Investment International Limited (IIIL) and Insight North America LLC (INA), each of which provides asset management services.