Partner Content by Columbia Threadneedle Investments

Bringing together E and S in ESG

Covid-19 prompted bond markets to respond quickly and at scale in 2020. The pandemic diverted investors’ attentions from purely “environmental” factors – the E of ESG (environmental, social and governance) – to “social” elements: health, education and employment. 

These Covid response bonds, which targeted the clear and present danger of the health crisis, helped push social investing to the fore. We expect exciting developments in this market – as well as in green and sustainability markets – to continue through 2022 and beyond.

Breakthrough bonds

There are numerous new types of issuance that will help deliver solutions for areas in need: KPI-linked bonds, or sustainability-linked bonds (not to be confused with sustainability bonds); blue bonds, which address biodiversity issues within oceans; and transition bonds that allow companies to retrofit their infrastructure and operations for a low-carbon economy.

Despite this, there remains much to be done to help fund the transition to a low-carbon economy. We must avoid greenwashing – and social washing – which will require greater rigour in the market, as well as products and instruments that are fit for purpose.

Moreover, with some existing products – specifically use-of-proceeds bonds – we must verify that the money is being channelled to the predetermined projects themselves, and that they generate measurable data that confirms funds are actually “doing good”. As such, we were pleased the UK government published a roadmap to sustainable investing which must be embedded within the requirements for investors, financial advisors and companies.

Exciting developments

We have long called for a UK Infrastructure Bank, and the announcement of just that in February 2021 was significant, with a promised £22 billion of infrastructure finance to tackle climate change and support regional and local economic growth. This complements the concept of place-based investment which we encompass within the way we analyse the social intensity of our funds – particularly addressing deprived areas within the UK. We look forward to further issues from UKIB in the next few years.

In addition, in May 2019 we began a campaign for a green gilt, and its launch in September 2021 was a key achievement of the past few years. In a first for comparable sovereign issuers, the green gilt will encompass the concept of “social co-benefits”, such as job creation, access to affordable infrastructure and socioeconomic advancement – pushing the boundaries of how impactful green bonds can be and bringing together the E and S within ESG. The £10 billion raised by the first issue in September 2021 proved there is a huge appetite for this type of potentially transformational investing.

We want to improve the market – in terms of opportunities for issuance, quality of bonds and reporting rigour – and continue to work with the International Capital Markets Association to achieve this. A huge part of this has been encouraging the market to embrace targeting. This can take years but does yield results, and we have had recent success with housing associations in particular, which are now issuing sustainability as well as social bonds.

In 2022 and beyond we will be working on the EU social taxonomy, a framework for what “good” looks like across social issues and areas, and our work at the Impact Investing Institute, where I sit on the Advisory Council, will also continue, with some of the projects potentially highlighting important developments within the impact industry for society and the environment in terms of how we use green finance.