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For today’s soundbites, we talk about global sustainable bonds with Jacob Hegge, investment specialist with JP Morgan Asset Management. We talked about ESG terminology, the growing popularity of green bonds, and we started by asking how investors should approach ESG opportunities.

Jacob Hegge (JH): It’s great to see all of this activity around ESG but as ESG continues to evolve in the fixed-income space, we think investors should continue to look under the hood and pay attention to what investment firms are saying when they maybe title a fund as being ESG. They really need to make sure that investment products are staying true to the prospectus, and are actually keeping an eye on those ESG measurements, and understanding how investment firms are staying true to their word.

On the standardization of ESG terminology.

JH: A consequence of this increased activity means a greater dispersion in terminology. So, investors definitely need to make sure that they understand these differences. And as ESG investing continues to grow, we’d expect to see more standardization but until then it’s important to understand that navigating the landscape can be difficult. If you shorten it down to two things when thinking about terminology, I think it comes down to transparency and consistency. And as ESG investing continues to grow globally, we’d expect this standardization to be more prominent in the market.

On the inevitability of greenwashing.

JH: We’ve seen record issuance in green bonds over the year but, unfortunately, yeah, I think greenwashing is an inevitable outcome from this increased issuance. Now, I wouldn’t say it’s prominent in the market space. But investors do need to be conscious of some of the names that they are investing in. As ESG standards continue to be developed and employed, we expect greenwashing to decrease. But until then, investors need to ensure that issuers are really staying true to their covenant in terms of bond issuance. With the COP-26 conference that happened in Scotland, we saw 151 countries that have now submitted new climate plans to slash their emissions by 2030. And corporations and financial institutions are undergoing tons of pressure following this. And with that increase in interest and scrutiny, not only coming from investors but now governments as well, we would expect to see greenwashing decrease.

What the future of ESG investing looks like.

JH: To sum it up in a sentence, it’s only going to go up. Discussions around climate and social issues are so prominent in today’s world. This year alone I think green social sustainability and sustainability linked bonds are expected to reach a combined issuance of over a trillion [dollars], which is doubled compared to last year. And, actually some expect that investment in green bonds will actually double and reach 1 trillion for the first time in a single year by the end of next year. So, we definitely think we’re going to continue to see growth in the ESG space. I don’t think we’re anywhere near — I could even say — the halfway point. If we just look back two years ago to where we’re at today, we’ve seen unbelievable, unprecedented growth in ESG. I definitely think that that’s just going to continue within fixed income going forward.

And finally, what’s the key takeaway on sustainable fixed-income investing?

JH: Don’t narrow your opportunity set by being put off by lower scores for high-yield or emerging-market debt economies. What’s important to see is that these scores are changing over time. So don’t be put off by a low score in maybe a high yield or emerging market debt name. We need to be monitoring these ESG scores, and what we want to see is that they are improving over time. And, finally, you know, you can find sustainable bonds in the market, even if they don’t have a sustainable label on them. The global fixed-income market is very large and there are a lot of opportunities out there. You can find sustainable bonds even if they don’t have a sustainable label in the market.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life. Our thanks again to Jacob Hegge of JP Morgan Asset Management.

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