Capitalism and Environmental, Social and Governance (ESG) principles need not be opposing forces. In fact, some experts suggest that capitalism has already made a profitable foray into the rapidly growing green bond arena.
As ESG reporting and ESG ratings as they apply to green bonds are currently fragmented and inconsistent, this could make sense for fixed income investors who want ESG benefits. Capitalism can solve these problems and may give investors more insight into the benefits of mutual funds such as exchange-traded funds. SPDR Nuveen Municipal Bond ESG ETF (MBNE).
An actively managed MBNE has several advantages. That means the municipal bond market could see more green bond issuance in the future as more cities and states look to finance renewable energy projects. The MBNE’s focus on municipal bonds can also alleviate some of the greenwashing concerns associated with investing in ESG bonds.
Researchers at the UCLA Anderson School say issuers and investors will benefit from ensuring bonds meet ESG requirements.
“A lesser-known ESG debt angle occurs when a borrowing company for some reason negotiates a standard loan and then adds some ESG kickers. For example, if the borrower Loan interest rates are subject to reduction if certain agreed ESG benchmarks are met.” UCLA research team.
Sustainability Linked Loans (SLLs) have also been applied to the corporate world, SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND)The RBND, which holds investment grade corporate bonds, is relevant to this conversation. This is because SLL issuers tend to be transparent from the start without pressure from regulators.
“Researchers found that nearly 39% of the sample identified positive COVID-19-related ESG performance and 21% reported bad ESG news. SLL borrowers are more aggressive than matched ‘control’ firms. 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,” UCLA added. .
SLLs are important. This is because until more ESG reporting standards permeate the fixed income market, some degree of self-regulation is necessary.
“As we wait for stronger mandatory reporting to come online to address greenwashing, it’s an interesting insight into how the SLL slice of capital markets can act as a low-key sheriff.” UCLA concluded.
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Opinions and projections expressed herein are Tom Lydon’s personal opinions and may not come to fruition. Information on this site should not be used or construed as an offer to sell, the solicitation of an offer to buy, or a product endorsement.