How to Identify Reputable ESG Bonds

June 9, 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.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Because environmental, social, and governance (ESG) strategies exclude some securities, ESG‐focused products may not be able to take advantage of the same opportunities or market trends as products that do not use such strategies. Additionally, the criteria used to select companies for investment may result in investing in securities, industries, or sectors that underperform the market as a whole.

Environmental, social, and governance (ESG) strategies implemented by mutual funds, exchange-traded funds (ETFs), and separately managed accounts are currently subject to inconsistent industry definitions and standards for the measurement and evaluation of ESG factors; therefore, such factors may differ significantly across strategies. As a result, it may be difficult to compare ESG investment products. Further, some issuers may present their investment products as employing an ESG strategy but may overstate or inconsistently apply ESG factors. An investment product's ESG strategy may significantly influence its performance. Because securities may be included or excluded based on ESG factors rather than other investment methodologies, the product's performance may differ (either higher or lower) from the overall market or comparable products that do not have ESG strategies. Environmental ("E") factors can include climate change, pollution, waste, and how an issuer protects and/or conserves natural resources. Social ("S") factors can include how an issuer manages its relationships with individuals, such as its employees, shareholders, and customers as well as its community. Governance ("G") factors can include how an issuer operates, such as its leadership composition, pay and incentive structures, internal controls, and the rights of equity and debt holders. Carefully review an investment product's prospectus or disclosure brochure to learn more about how it incorporates ESG factors into its investment strategy.