Fixed Income ESG Outlook 2023: Inflows and Issuance on the Rise
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BLOG | MARCH 13, 2023
Fixed Income ESG Outlook 2023:
Inflows and Issuance on the Rise
Lauren Kashmanian, Director, Portfolio Management and Responsible Investing
Increasing focus on climate change, the clean energy transition, and macroeconomic uncertainty in 2022. With the easing of inflation and
the political backlash against it have brought mainstream awareness interest rate hikes, we could also see overall debt issuance return to
to environmental, social, and governance (ESG) investing. As investors more normal levels and, in turn, an increase of sustainable bonds in
become aware of the need for the financing of climate-focused projects line with the growth we saw prior to 2022.
to meet global climate goals and the social and financial benefits they
can reap, two major themes are emerging in ESG in 2023: Given the rising necessity of financing climate-focused projects, there
will likely be an increase of global sustainable bond issuance. A big
> Individual and institutional investors want to align their investments cause of growing investor interest in ESG fixed income strategies is
with the principles of responsible investing. the ability to finance projects with the use of proceeds that are directly
connected with sustainability and social impact. The S&P is predicting
> B
oth issuers and investment managers want standardization and that a 14% to 16% share of overall global debt issuance in 2023 will be
transparency in the ESG fixed income markets. labeled as green, social, sustainability, and sustainability-linked bonds.
This is an increase from 13% in 2022 and 12% in 2021. The share of
Will ESG fixed income continue to grow through 2023? sustainability-labeled issuance has increased yearly, in fact, and that
There are some notable data points to mention in the ESG investing trend is forecasted to keep going up. Green bonds in particular continue
space looking back on 2022. For the first time, fixed income ESG to see growing sustainable bond issuance, representing 55% of overall
outpaced equity ESG fund flows. According to Morningstar, ESG bond sustainable debt in 2022 compared with 52% in 2021, according to
funds pulled in $2.4 billion in 2022, accounting for just over two-thirds S&P Global. This is attributable to two factors: increasing financing for
of ESG fund flows for the year, versus $1.2 billion in ESG equity. This climate-focused projects and decreasing social bond issuance from
is down from $11.1 billion for ESG bond funds and $56.4 billion in ESG what the market needed during the COVID-19 pandemic.
equity funds in 2021. Overall, mutual funds saw net outflows of $957.6
billion in 2022.
Although overall inflows were lower in 2022 than the previous year,
ESG inflows still outpaced those into the broader fund market. Lower
ESG bond flows can also be attributed to macroeconomic headwinds,
such as inflationary pressure, increased interest rates, and fears of a
looming economic recession, which led to a slowdown in contributions
to fixed income strategies.
We also saw a decline in sustainable bond issuance from 2021 to 2022,
with a total of $863 billion of ESG-labeled debt issued globally, according
to Bloomberg. This is a decrease from the record of $1.06 trillion of
issuance set in 2021. S&P is predicting global sustainable bond issuance
of green, social, sustainability, and sustainability-linked bonds to return
to $1 trillion in 2023. But sustainable debt issuance declined due to
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Fixed Income ESG Outlook 2023: Inflows and Issuance on the Rise 2
Will sustainable bond issuance grow to meet Investors and regulators are placing larger scrutiny on greenwashing,
or the misrepresentation of the environmental practices of an issuer
government climate pledges? or the environmental benefits of a bond issue. Since corporations and
Recent policies and commitments to address climate change by municipalities are issuing ESG-labeled debt in increasing numbers,
governments around the world could also lead to increased sustainable it’s important for managers to have policies and procedures to avoid
bond issuance over time. The Inflation Reduction Act of 2022 contains greenwashing in responsible investing vehicles. Issuers also need to
$368 billion in funding earmarked specifically for climate-focused undertake more due diligence when self-labeling bonds as sustainable
projects, aiming to reduce US greenhouse gas emissions to 40% without third-party verification. The lack of standardization on
below 2005 levels by the year 2030. Clean-energy and energy- sustainability-labeled bonds demonstrates that investors need to do
efficiency initiatives like this will likely be partly funded through the additional investigation before making their selections. They need a
municipal bond market. The act could also incentivize corporations comprehensive look at the overall ESG footprint of the issuer and use
to issue more sustainability-labeled debt through tax credits. These of its proceeds. Until improved standardization comes to the industry,
could be used for investments in clean energy projects and Leadership managers should rely on a proprietary, holistic research framework
in Energy and Environmental Design (LEED)-certified building projects. that can capture all material ESG factors when determining the
This should increase the overall issuance of green and sustainability- issue’s suitability for a responsible investing portfolio.
labeled debt in coming years, since these projects are aligned with the
US government’s climate goals. The bottom line
The 2022 United Nations Climate Change Conference also brought As 2022’s fund flows demonstrated, investors have an increasing
fresh new climate pledges from governments around the world as interest in fixed income responsible investing strategies. As issuance
the need to address increasing global temperatures becomes crucial. and investment in the sustainable debt markets grow, transparency
To limit the rise in global temperature to 1.5 degrees Celsius, the along all steps of the investment process is critical. Managers should
International Energy Agency estimates that the investment in clean demonstrate this transparency to investors with a holistic and
energy needs to triple by the year 2030, which could cost upward of comprehensive approach to ESG research and reporting.
$4 trillion. While some countries, including the US, increased their
financial commitments to reach this goal, private capital and funding
through the capital markets will be necessary for the clean energy
transition as well. This will require more financing through the public
debt markets and will also contribute to greater green-labeled global
bond issuance as we get closer to the 2030 timeline.
Will scrutiny over greenwashing lead to more ESG bond
regulation?
Investor appetite will be a contributing factor in whether we’ll see
higher sustainable debt issuance in 2023. And as demand increases,
the SEC has continued to conduct industry-wide audits on ESG
funds. There may be growing regulation over the ESG investing space
as a result. Tightening regulations and more standardization and
transparency will likely create more integrity around the responsible
investing markets. This includes increasing standards for both the
issuers of sustainable bonds and the managers of responsible investing
funds and strategies.
Potential Parametric solution
Whether you call it ESG, SRI, impact investing, or
responsible investing, Parametric offers uncomplicated
portfolios investors can tailor to align to their values.
Learn more at
parametricportfolio.com/solutions/institutional/
responsible-investing.
©2023 Parametric Portfolio Associates® LLC parametricportfolio.com/blog
Fixed Income ESG Outlook 2023: Inflows and Issuance on the Rise 3
Lauren Kashmanian, Director, Portfolio Management and Responsible Investing
Lauren works with Parametric’s Fixed Income Investment Team. She is responsible for buy and sell decisions,
portfolio construction, and risk management for the firm’s municipal SMA strategies. Lauren specializes in
Parametric’s ESG muni separately managed accounts. She joined the firm in 2008 (originally as an employee
of Parametric’s parent company, Eaton Vance). Lauren began her career in the investment management
industry in 2007. Before joining Eaton Vance, she was a portfolio associate at State Street Bank & Trust.
Lauren earned a BBA, cum laude, from the University of Miami and an MBA from Fordham University.
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