One of the strongest narratives driving market trends in recent years has been the increase in client interest in sustainability or other types of environmental, social and governance mandates.
The latest data from the Investment Association shows that this demand has survived recent market conditions, with a net inflow of £280m in February into ESG-focused open-ended funds, bringing the total to £28bn. sterling, or 5.5% of assets under management. of the open-end fund market – a proportion that has roughly doubled over the past decade.
The vast majority of these assets are held in equity mandates, and many of the trends and dynamics driving sustainable equities are well known.
But there are also responsible bond funds, although these are far fewer in number, and the thematic and macro drivers of the performance of these funds are less well known.
A major question customers and suppliers have had to grapple with is whether to use government bonds in responsible investment portfolios, given that most governments deploy a budget to fund armies and military spending.
But if you ignore government bonds, how do you achieve diversification?
According to Sandra Crowl, stewardship director at Carmignac.
In total, there are just over 60 bond funds that present themselves as ESG or sustainable, about half the number of sustainable funds available in the open equity universe, according to data from sister publication FTAdviser Asset Allocator. .
Crowl says: “While still underserved by investor demand, investors now also have a choice. Whereas 10 years ago sovereign bonds accounted for around 74% of total issuance, today financial corporate bonds represent 25%, non-financial bonds 35% and sovereign bonds 40%.
Just as the regulatory outlook has impacted demand for equity mandates, it has and will also drive demand for ESG fixed income funds, according to Crowl.
She says: “The EU Green Deal for Green Finance, the EU Sustainable Finance Regulation and the change in ESG investment preferences for a more sustainable future ensure that fixed income investments will not be left behind. account.
Green investment bonds
One of the ways the market has attempted to solve the conundrum of whether government bonds can ever be ethical is by creating so-called green investment bonds, which allow bonds to be issued by governments and companies with the income mortgaged (which i.e. restricted to being deployed only on specific projects), which allows the bond investor to better understand that their capital will only be deployed in an aligned manner on its priorities.
Perhaps indicating that investing in government bonds is a problem, the launch of green bonds by the UK government, alongside more corporate issuance, has seen the number of green bonds in the market double in two years, according to Crowl.