The fixed income market is a large and relatively untapped market for sustainable investing, but things could begin to pick up as more look to investment options that track environmental, social, and governance principles.
According to a senior JP Morgan banker, the market for bonds linked to companies meeting certain environmental goals could expand 20-fold this year to between $120 billion and $150 billion as businesses look to capture a sudden surge in demand, Reuters reports.
Along with bolstering bets on internet and tech names, the Covid-19 pandemic has fueled demand for ESG-related investments as a more investors consider future risks that could affect the world, fueling the increased volume of green and social bonds sold to raise new funding.
ESG-linked bonds require the issuer to spend proceeds on targeted projects that meet certain ESG goals. On the other hand, sustainability-linked bonds allow firms to raise money for general corporate purposes, but if they do not meet the sustainability goals, the issuers can pay investors extra.
Marilyn Ceci, global head of ESG developed capital markets (DCM) at JP Morgan, pointed out that these sustainability-linked bonds, or SLBs, are another way for companies to show a commitment to an ESG goal without actually constraining themselves to particular projects.
“I’m calling for the SLB market to grow to around $120 to $150 billion since market inception, and I expect we’ll get that this year,” Ceci told Reuters, noting that SLB issuance since inception was about $20 billion and year-to-date volumes stand around $6.9 billion. “I get calls from investors more and more saying that they want more SLBs, they like the holistic approach, and they lke the skin in the game.”
According to the Climate Bonds Initiative, global green bond issuance could surge to $400 to $450 billion in 2021, compared to almost $270 billion last year.
Ceci has a more optimistic view, projecting the overall market for green, social and sustainable bonds to expand 49% this year to around $690 billion.
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