Investors will accumulate $ 54 billion in ESG bond funds by the beginning of 2021

In the first five months of 2021, investors will have paid $ 54 billion to specialty funds specializing in environmental, social and governance issues, even as concerns about potential “greenwashing” have increased.

After several years of sale of bumpers of capital products that focus on ESG, investors are now turning their attention to fixed income funds, according to figures collected by Morningstar, the data provider.

In total, sales of all bond ESG funds reached $ 54 billion in the year to the end of May, compared to nearly $ 68 billion for the whole of 2020. The data covers open-ended funds and exchange-traded funds. exchanged throughout the world.

Managed activity in products increased 14 percent to $ 374 billion between January and May, while they nearly tripled in three years. In 2020 alone, assets will increase by 66 percent, compared to a 12 percent increase in assets across the universe of fixed-income funds.

Growing demand has sparked a rush of new fund launches, while companies and governments have unveiled bundles of social and green bonds to exploit the trend. But growing interest has raised concerns about the so-called greenwashing, including fears that some bond funds will not be as durable as they claim to be and that fund managers will find it difficult to decipher their ESG credentials.

Jose Garcia-Zarate, associate director at Morningstar, said that “there is a clear trend towards the growth of ESG, especially in Europe,” but many fund managers are struggling with “how to apply ESG principles.” to certain bond markets ”. He said the attempt to label government titles with ESG criteria had proved “very, very difficult” since “there is still no consensus on how it is going to classify governments and countries.”

Demand for ESG bond funds is concentrated in Europe, but other regions are beginning to see interest, Garcia-Zarate said. In the United States, sales of ESG bond funds totaled $ 4.75 billion in the first five months of 2021, compared to $ 5.92 billion for the entire past year.

There is also a growing demand for passively managed ESG bond funds, which typically follow the index. More than $ 17 billion has been invested in these products this year, surpassing last year’s record of $ 15.6 billion, according to Morningstar.

Colin Purdie, chief investment officer for liquid markets at Aviva Investors, which recently launched a bond fund focused on the climate transition, said: “The ESG drive is everywhere. . . It’s no surprise that we see fundraisers coming through. ”

Morningstar data shows that there were 122 new ESG bond funds launched last year, with another 44 new offers in the first quarter of 2021.

But Purdie added that there have been challenges for fixed-income investors when it comes to ESG: “There is a view that ESG is easier to trade and one reason why it is because of data,” he said.

In areas such as high yields or emerging markets, generally considered more speculative investments, data disclosure around ESG remains a problem. “There is a higher credit resource requirement to ensure you have the information you need,” he said.

Despite this, issuers have been racing for the market with new sustainable debt. BloombergNEF data shows $ 245.3 billion in green bonds were issued this year, $ 83.8 billion in sustainability bonds and another $ 129.2 billion in social bonds. In contrast, in the five months to the end of May 2020, $ 91.44 billion in green bonds were issued, and another $ 15.21 billion in sustainability bonds and $ 27.87 billion in social bonds.

Column chart of Net assets under management ($ billion) showing Bond funds win in insatiable ESG appetite of growing investors

Bryn Jones, who runs the Rathbone Ethical Bond fund, one of the oldest and largest fixed-income ESG funds, said there has been a “huge increase in the supply” of green and social bonds over its 17 years. fund management.

He said the demand for ESG bond funds has been driven by a combination of regulations, such as efforts in the UK to raise pension funds to consider the impact of ESG on investments, as well as new cohorts of investors, such as millennials and younger investors who are interested in seeing their money do good and generate returns.

Despite the rapid increase in demand for ESG bond funds, they still account for less than one-fifth of total sustainable fund assets, according to Morningstar.

A survey of Nordic and Dutch investors by NN Investment Partners in May found that almost half of those surveyed say green bonds are their preferred fixed-income option. Some 81 per cent of Nordic and Dutch pensioners said they were already invested in green bonds.

But those interviewed also expressed their concerns about the green washing by companies, saying this was the biggest obstacle to investment.

Simon Bond, managing director of the responsible investment portfolio at Columbia Threadneedle Investments, said that although there have been some cases where issuers have been accused of this, the problem was not widespread. But Bond added the growing attention to green washing is positive.

“It’s a good thing. A light shines on that dark corner. It’s pretty hard to hide when you have that light shining in this angle of ESG, ”he said.

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