Financial advisers have confirmed rising or stable interest from clients in bonds that focus on Environmental, Social and Governance (ESG) factors, according to new research from Aviva Investors, the global asset management business of Aviva plc (‘Aviva’).
More than two in five (43 per cent) advisers are seeing an increase in demand for such bonds, while 56 per cent say that the demand is constant.
The momentum towards ESG integration is such that 62 per cent of advisers believe the conventional ‘brown’ bond market will be completely green by 2040, including 3 per cent who expect it to happen by 2025; 35 per cent who say by 2030 and 24 per cent who cite 2040 or later. Only 38 per cent say this will never happen.
Two thirds (67 per cent) say the investment vehicles most likely to be used to meet the growing appetite for ESG-linked fixed income are sustainability-linked bonds, which pay investors higher coupons if they fail to meet sustainability targets. Other types of vehicles cited by respondents include traditional bonds issued by companies with sustainability credentials and proven to do no harm (44 per cent), climate bonds (22 per cent) and green bonds (19 per cent).
The primary driver of advisers’ interest in allocating more capital to ESG bonds is their belief that it is the right thing to do (38 per cent), ahead of the belief that it will deliver better long-term returns (21 per cent) and a lack of better opportunities in conventional bonds (17 per cent).
Advisers see some barriers to their clients investing in ESG-linked bonds, however. The greatest such obstacle is a lack of education and understanding about these instruments, which was cited by 54 per cent. Other factors include a lack of standardisation or transparency around ESG and green bonds (31 per cent) and a lack of interest owing to ESG criteria being regarded as a short-term fad (17 per cent).
Apiramy Jeyarajah, Head of UK Wholesale at Aviva Investors, says: “Wholesale investors care about how their money is being invested and increasingly want to see their funds put to use in support of sustainable businesses that will benefit the environment and society, as well as deliver a good return. The business and investment case for responsible investment is hard to dispute these days, but with a wide variety of instruments coming to market, advisers must take a holistic view of the companies that are issuing them. Companies that conduct their business in a truly sustainable way are more likely to succeed over time, but bad or incomplete practices don’t just hit the headlines, they hit the bottom line as well.”