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Growing client demand for ESG bonds

Growing client demand for ESG bonds

Financial advisers have seen growing interest from clients in bonds that focus on environmental, social and governance factors.

According to research from Aviva Investors, more than two in five (43 per cent) advisers are seeing an increase in demand for such bonds, while 56 per cent said demand was constant.

The research was conducted by Citigate Dewe Rogerson and surveyed a panel of 100 UK based financial advisers in April and May 2021.

It found that approximately 62 per cent of advisers said they believed the conventional ‘brown’ bond market would be completely green by 2040, while 3 per cent expected it to happen by 2025.

Apiramy Jeyarajah, head of UK wholesale at Aviva Investors, said: “Wholesale investors care about how their money is being invested and increasingly want to see their funds put to use in support of sustainable businesses that will benefit the environment and society, as well as deliver a good return. 

“The business and investment case for responsible investment is hard to dispute these days, but with a wide variety of instruments coming to market, advisers must take a holistic view of the companies that are issuing them.”

Jeyarajah added: “Companies that conduct their business in a truly sustainable way are more likely to succeed over time, but bad or incomplete practices don’t just hit the headlines, they hit the bottom line as well.”

Two thirds (67 per cent) of respondents said the investment vehicles most likely to be used to meet the growing appetite for ESG-linked fixed income were sustainability-linked bonds, which Aviva said paid investors higher coupons if they fail to meet sustainability targets. 

Other types of vehicles cited by respondents included traditional bonds issued by companies with sustainability credentials and proven to do no harm (44 per cent), climate bonds (22 per cent) and green bonds (19 per cent).

The primary driver of advisers’ interest in allocating more capital to ESG bonds was their belief that it was the right thing to do (38 per cent), that it would deliver better long-term returns (21 per cent) and a lack of better opportunities in conventional bonds (17 per cent). 

However, advisers also cited some barriers to their clients investing in ESG-linked bonds, such as the lack of education and understanding about these instruments (54 per cent).

Other factors included a lack of standardisation or transparency around ESG and green bonds (31 per cent) and a lack of interest owing to ESG criteria being regarded as a short-term fad (17 per cent).

sonia.rach@ft.com

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