ESG is having a significant impact on what institutional bond traders trade, but not on where or how they trade, according to a new paper – . role of ESG in bond trading – from Coalition Greenwich.
The study, which polled 50 US based buy side bond traders in the fourth quarter of 2021, found 64% had traded green bonds in the past year, with another 8% planning to start trading the instruments in the next 12 months.
The study notes that more than half a trillion dollars of green bonds were issued in 2021, the highest level since the market was defined. This category encompasses both bonds that include incentives based on issuer behaviour such as cutting their carbon footprint and those for which the proceeds are used for environmental and/or social projects.
While the investment returns and ultimate impact of these bonds remains a huge source of debate, and 2022 market conditions through May have proven challenging for bond issuance broadly, the long term demand for green bonds is undeniable.
This investor demand has then brought forth the need to trade these bonds in the secondary market, with portfolio managers looking for new paper as interest rates and the total number of issuers rise.
“The rapid growth of green bond trading volumes among institutions reflects both the record issuance of more than a half trillion dollars in green bonds in 2021 and the increasing demand among investors of all types for sustainable assets,” says Kevin McPartland, head of Research at Coalition Greenwich Market Structure & Technology and author of the report.
The report also examines how the spread of environmental, social and governance (ESG) standards across the investment universe is affecting U.S. bond markets and concludes that, although ESG is influencing institution’s decisions about what to invest in and trade, it is not yet having much of an impact on their choice of where they trade or whom they trade with.
It found that while ESG factors are impacting bond selection, they as of yet are having limited impact on how US buy side bond traders select their trading venues and counterparties.
Only 4% of respondents stated that ESG scores are having an impact on their trading venue selection, while more than half (53%) of institutions have policies that encourage trading with minority-owned counterparties.
ESG scores over time may start to influence counterparty choices, especially if regulations increasingly drive the market to consider such data. For now, however, most buy-side traders are bound by fiduciary rules that require them to find the best possible price for the given bond.
“While the environmental, social and governance habits of the trading venue facilitating that price discovery and the dealers providing those prices matters to the world at large, there is nothing to suggest that ESG scores impact execution quality,” says McPartland.
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