What are bond issuers looking for

New study shows: sustainable companies are better bond issuers

"We are in a boom era for bonds that are tied to sustainability criteria," says Saida Eggerstedt, Head of Sustainable Credit at Schroders, in a recent insight from the investment company. According to this, green bonds totaling US $ 226 billion were issued worldwide in the past year alone. In 2015, the volume was around 40 billion US dollars, as Schroders emphasizes. And according to the Investor Service of the rating agency Moody’s, we can expect a record value of 650 billion US dollars for 2021, which would correspond to an increase of 32 percent over the previous year.

Companies and governments use green bonds to raise funds for environmentally friendly initiatives. But the boom in sustainable papers is meanwhile leading to more and more types of bonds. The Hamburg transport and logistics company Hapag Lloyd issued a so-called sustainability linked bond at the end of March. The collected outside capital can be used for all corporate purposes. At Hapag Lloyd, for example, they want to replace an existing bond. However, the financing conditions for the new sustainability linked bond are linked to certain sustainability goals for the company. If this is not achieved, the financing becomes more expensive for the company.

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Really green or just painted green?

It is therefore becoming more and more opaque for investors to assess how sustainable a bond exposure really is. Does the purpose of the funds have to be sustainable or is it enough for the company to commit to certain ESG goals? Western Asset Management, one of the largest bond managers belonging to Franklin Tempelton, has now investigated this question in a study. They examined the relationship between ESG ratings of companies and the following bond returns in different sectors. In other words: does ESG integration have a positive effect on the return of a bond portfolio? Yes, the study says. Because as a result, higher ESG scores also lead to outperformance of the associated bonds - however, this correlation could not be confirmed for all sectors, for example not for industrials.

“For the current study, our risk management team used machine learning tools to measure how ESG integration affects the financial returns of a bond portfolio. Our analysis shows: Issuers with better ESG metrics, along with other key factors, tend to deliver better performance - even if the portfolio is managed according to different spreads and spread durations, ”says Bonnie Wongtrakool, Global Head of ESG -Investments and portfolio manager at Western Asset, about the study results. She also emphasizes that the study looked at data from a ten-year period and various interest rate environments. This is why Western Asset is convinced that ESG integration can generate added value, especially in a world with low bond yields.

Mitigate financial risks

Ronald van Steenweghen, Portfolio Manager Fixed Income at DPAM, assesses ESG integration for bonds in a similar way: “Basically, ESG-compliant corporate bonds usually use the same criteria for the selection of issuers as for ESG stock selection. Investors who invest in ESG-compliant bonds reduce the primarily non-financial risks associated with the three ESG dimensions by eliminating the relevant issuers from the investment universe. "

Western asset expert Bonnie Wongtrakool also emphasizes that ESG integration can help investors identify better investment opportunities while mitigating financial risks. The current study would only further support the company's commitment to ESG integration: “In our analysis, we focused on an investment horizon of between three and six months because we consider this to be in addition to the current school of thought around ESG integration, which predominantly covers longer-term topics. "

High demand drives courses

What investors have to consider, however: The high demand for green bonds and ESG-compliant bonds makes entry expensive - and that's bad for bonds. Bond investors want to get in when prices are falling, because that means that a bond can be bought cheaply - i.e. below the 100 percent that can be expected at the end of the term - and the investor thus earns a price gain. Steenweghen also has this to consider: “The high demand for ESG-compliant bonds is driving the prices of these papers up. For the issuer, this means that they are rewarded for their commitment to ESG by offering less return in the market. If you are invested in these bonds as an investor, you benefit in reverse from the better price development. However, this does not apply if an investor is new to such ESG bonds, then one receives the lower return currently prevailing on the market. "