ESG-labelled bonds: looking beyond the ‘label’


ESG-labelled bonds: looking beyond the ‘label’

Robb Barnum and Sean Conaghan of NEAM

ESG analysis will remain an important part of investment processes and shows tremendous current growth, but ESG-labelled bonds could play a less prominent role in sustainable investment strategies in the future, say Robb Barnum and Sean Conaghan of NEAM.

Green, social, and sustainable bonds—collectively known as environmental, social and corporate governance (ESG)-labelled bonds—specify that an amount equal to the bond proceeds will be invested in environmentally responsible initiatives or socially conscious projects, or, for sustainable bonds, a combination of both.

For the investor inclined towards sustainability, the growth in ESG-labelled debt outstanding, as discussed in a previous NEAM Quick Takes from December 2021 may seem like a great opportunity. However, investors must look beyond the ESG label since that label is not a guarantee that a bond will meet one’s ESG expectations.

For example, in the spring of 2021 an issuer of non-agency residential mortgage-backed securities labelled at least one of its securitisations as a “social” bond because the underlying loans were made to individuals whose borrowing needs did not conform to US agency standards and who therefore were, in the view of the issuer, underserved borrowers.

NEAM, Bonds, ESG, Climate Change, Insurance, Reinsurance, Robb Barnum, Sean Conaghan, North America

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