We don’t often talk about bonds and faith-consistent investing, indeed the most recent slice of our Investment Policy and Guideline (IP&G) database that underpins our Good Intentions research, shows that while nearly 80% of faith-based asset owners apply values to their equities (stocks), 20% fewer apply them to their bonds. Why?
The International Finance Corporation (IFC, part of the World Bank Group) has published a report on major developments in the green, social, sustainable and sustainability linked (GSSS) bond markets through 2023, that hints at answers.
Important to note – GSSS is a young market, the first GSSS Bond was issued only in 2012, and it still represents a ‘small corner’ of the total global bond market, at just 2.5% of all bond issuance as of year-end 2023. So, it is relatively new and investable GSSS bonds are more difficult to source, and in part because of this, with basic supply / demand economics, the IFC finds that GSSS bonds tend to trade at a premium (i.e. more expensive) versus regular or ‘conventional’ bonds. Possibly because of this and the near US$1.8 trillion spent globally last year alone on ‘transitioning to green energy’, according to the report, GSSS bond issuance – new bonds created and sold – exceeded US$1 trillion in 2023, matching the record issuance of 2021, while emerging markets ‘surged 45% in 2023 to reach US$209 billion, an all-time high’.
What’s behind the jump in issuance?
'Easing inflationary worries, projected rate cuts by the U.S. Federal Reserve and other central banks, and benign growth outlooks…'
'…governments and companies stepping up efforts to confront the climate challenges they face…'
“In short, rising financing needs to fund green transitions in emerging markets are meeting growing demand that is capable of absorbing more growth in GSSS bond issuance”
Green Bonds, ‘…instruments with proceeds earmarked exclusively for projects with a positive environmental impact…’ represent the majority of the GSSS market, at 2/3rds of issuance, though Social Bonds, those that target social outcomes typically for a specific ‘target population’, had the fastest growth in 2023, at 543% (page 10 of the report has a good summary of the various types of bonds considered part of GSSS). Big issuers tend to be financial institutions, companies (primarily utilities, industrial and energy) and some countries – particularly in emerging markets, where China accounted for 63% of all emerging market issuance.
For your bond investment manager, the availability of bonds may be smaller than these numbers indicate; as just 111 of the emerging markets bonds issued last year were considered ‘benchmark-sized’ (large enough to be owned by major investors), with a small minority, just 18%, carrying a credible credit rating from a global agency.
Towards the end, the authors note, along with market size, selection and bond availability…
“More work needs to be done by regulators and policy makers to further underpin market structure, enhance regulation, fine tune categorization, and work toward greater crossborder compatibility…” as “…a more credible, well regulated, and transparent GSSS bond market will help reassure more international investors.”
As the GSSS market continues to develop, its potential as an avenue for expressing your faith’s values in your investments should similarly open up. It’s worth adding to your ‘wish list’ and at regular check-ins with your bond managers seek their views on how investable and attractive this area of the bond is and will be, and their plans for monitoring developments and creating investment options for values based investors.