How to Identify Reputable ESG Bonds

June 10, 2022
Not all ESG bonds are what they purport to be. Here's how to help identify the reputable ones.

Issuance of bonds with positive environmental, social, and governance (ESG) attributes reached record highs in 2021. And still, investor demand continues to outpace the supply of such bonds.

Bond boom

The issuance of bonds with ESG characteristics globally hit record highs in 2021. 

In 2014, $64 billion of ESG bonds was issued. The amount grew slightly to $77 billion in 2015 and then increased rapidly each year until reaching a global high of $1.5 trillion in 2021.

Source: Bloomberg, as of 12/13/2021.

"Unfortunately, there's no single regulatory body governing this space, meaning issuers can label their bonds as ESG-positive without adhering to internationally established standards," says Dana Villanova, a director of client portfolio management supporting Wasmer Schroeder™ Strategies at Charles Schwab Investment Management. "Conversely, it's possible to find bonds that are unlabeled by the issuer but actually do have positive environmental or social benefits."

So, how can investors identify reputable bonds that align with their values and goals?

One way to avoid so-called greenwashing is to determine whether an issuer has labeled its bond in accordance with internationally recognized standards and has used an approved verifier. For example:

  • The International Capital Market Association recommends issuers follow a set of principles that promote greater transparency, disclosure, and reporting on the use of a bond's proceeds, which can be found on a bond's offering documents.
  • The Climate Bonds Initiative certifies bonds that meet the International Capital Market Association's Green Bond Principles and whose aims are consistent with those of the Paris Agreement. To receive the "Climate Bonds Standard Certified" label, an issuer must submit to an external review by an approved verifier and include the resulting report in its offering documents.

If the work required to identify reputable ESG-oriented bonds feels daunting, you might instead consider a bond fund, an exchange-traded fund, or a separately managed account whose portfolio of individual securities aligns with your goals and priorities. The management teams behind these investment vehicles often implement robust, proprietary screening methodologies. "Professional due diligence can really help increase an investor's confidence in the ESG investment space," Dana says.

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