Although the market for impact bonds, where proceeds are used for positive environment or social schemes, is diverse, there are still a number of impact bonds that fall short of the minimum standards for sustainability set by Insight Investment.
In 2019 alone, the manager marked 10 green bonds as red. By comparison, only one instrument was marked red in 2018.
Issuance of the bonds would continue to be dominated by governments, financials and utilities, however three new telecommunications companies began issuing impact bonds in 2019 and saw them oversubscribed.
According to Insight Investment, there should be a greater alignment between the objectives of these bonds and the strategic interests of the entities issuing them.
“Too many impact bonds are simply bolt-on sustainability programmes, quite separate to the ongoing activities of their issuers’ day to day businesses,” Insight Investment’s senior ESG analyst, Josh Kendall, explained.
“It prompts the question; how authentic are these bonds? We want to reach a point where there is no distinction between a bond’s impact objectives and its issuer’s core operational activities.”
Insight had a methodology in place where a traffic light score was assigned to impact bonds, where red would indicate concerns around transparency on how proceeds would make an environmental difference.
“Our focus for assessing the value of these bonds is the alignment with the issuer’s core business and a commitment to quantitative, transparent reporting on the bond’s impact,” Kendall said.
“Increased diversity is positive but impact initiatives in sectors such as utilities may ultimately effect greater change because they achieve efficiencies in more carbon intensive industries.”