Incorporating environmental, social and governance (ESG) factors into equity investing is more mature, but the fixed income market is catching up according to Coalition Greenwich.
The survey showed that nearly all, 94%, of fixed-income investors intend to increase their ESG allocation over the next two years.
However, it said one worry is around liquidity and whether the market is deep enough to support trading activity.
Coalition Greenwich noted that lthey are not alone. Liquidity concerns plague the entire bond market, with ESG bonds facing liquidity challenges alongside high-yield, municipal and other bond subsegments.
The survey found that three quarters of the sample said liquidity is at least somewhat sufficient for ESG bonds, while almost four in 10 do not view liquidity to be an issue.
“This liquidity confidence is one reason why 94% of fixed income investors may feel comfortable increasing allocations to these instruments,” said Coalition Greenwich.
It added, “Existing participants expanding their activity, combined with new entrants and a maturing market structure, should, over time, alleviate liquidity concerns, though this will not be not an overnight change.”
Total global issuance of green, social and sustainability bonds increased from $89.7 billion in 2016 to $559bn in 2022, down from a peak of $872bn in 2021, according to the report.
Green bonds accounted for 63.5% of overall market issuance.
“If 2022 volumes were anomalous for all issuances due to the volatile macro conditions, then 2023 and beyond could see a healthy rebound,” said Coalition Greenwich. “Our research indicates that any dislocations in issuances in 2022 are likely not indicative of the future demand for ESG issuances.”
Almost half of respondents cited performance of the asset as the reason to invest. Therefore, investors will need to quantify the returns of their ESG holdings and prove that those holdings fulfill the combination of providing appropriate returns while also achieving other social goals.
©Markets Media Europe 2023
