Posted inFixed Income

Impact bonds come under greater scrutiny

Amid the growth in the impact bond market, investors need to be mindful of the potential risk of impact washing, according to Insight Investment.

With the burgeoning impact bond market offering increasing choice and diversity of products, investors need to be focused on how to assess the level of impact and positive influence they are actually having.

It starts with investors thinking about the outcomes they wish to achieve through their investment, beyond purely financial ones.

This involves expressing values in portfolios as both a way of reducing risk and ensuring a broader positive societal and/or environmental impact.

Given that impact bonds can offer access to impact KPIs such as the annual greenhouse gas emissions avoided or the new renewable energy generated annually via targeted investments, Insight Investment, a subsidiary of BNY Mellon, believes that by pulling this data from an issuer’s impact reporting, investors can measure the impact generated for strategies focusing on impact bonds.

An expanding market

This is becoming more important as the market for impact bonds continues to grow. For example, explains Insight Investment, outstanding impact bond issuance surged to over $1trn in 2021.

More specifically, sovereign and supranational impact bond issuance has continued to rise, with the UK and European Commission issuing their first green bonds last year, added the firm.

Issuer diversity is now growing. While impact bonds have mostly been issued by government, financial and utility issuers, more sectors have begun engaging in impact bond issuance, with other corporates gradually catching up.

At the same time, more varied impact bond type offerings are emerging as issuers cater to an ever-sophisticated impact investor.

To date, the three most common types of use-of-proceeds impact bonds have been green bonds, social bonds and sustainability bonds – determined by the issuer based on its primary objectives for the underlying projects.

Emerging sub-classes of impact bonds, however, include blue bonds, gender bonds, transition bonds and even a rhino bond.

Staying on-message

However, against this backdrop of this evolution, combined with a lack of regulation, ‘impact washing’ has become a growing concern, according to Insight Investment.

This occurs when issuers label their bonds as impactful in nature, with little intention of using the proceeds toward any demonstratable impact.

Insight Investment believes the new EU green bond standards and the EU taxonomy – a classification system, establishing a list of environmentally sustainable economic activities – should introduce more market standardisation and give access to more complete information that will be genuinely relevant to investors over time.

Yet until more formal frameworks are enforced, the firm urges investors to carry out appropriate due diligence to avoid falling victim to impact washing.

Part of the Mark Allen Group.