ESG-labelled bonds – the carrot and the stick

ESG-labelled bonds – the carrot and the stick

One of the pushbacks that investors in fixed income funds often make is: “Can bondholders really influence companies on sustainable issues in the way equity holders can?”

 

It’s a fair question - after all, we provide companies with capital but we don’t own any equity, nor do we have any voting rights.

 

However, to dismiss fixed income investors as mere bystanders would be to overlook what is going on beneath the surface. For those of us who take part in corporate credit calls, one of the first questions analysts often pose is on the subject of ESG. Corporates are quickly realising that credit investors directly impact on their cost of debt, which of course facilitates greater or less shareholder returns.

 

As a result of fixed income engagement, of which Aegon AM is at the forefront, we are seeing a plethora of sustainable debt being issued by both investment grade and high yield rated companies (illustrated in the chart below). Over the past year the market has evolved from mainly ‘green bonds’, which are tied to positive impact projects, towards sustainability-linked bonds where the coupons can be adjusted depending on corporations hitting pre-defined sustainability targets. These initially started off as coupon steps when targets are missed - but more recently we’ve seen the first deal (from Klockner Pentaplast – a plastic packaging company) where a coupon can also fall if objectives are met or exceeded.

 

As a result, fixed income investors are now armed with both carrots and sticks in which to engage with corporate management teams on ESG issues.

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Source: Bloomberg

Mark Benbow

Investment Manager, Fixed Income

Mark Benbow is an investment manager in the Fixed Income team. He specialises in high yield bonds and co-manages two of our global high yield bond funds, covering all maturities.

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