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Sustainable finance grows up

Green investors cannot stick to green bonds

Olly Copplestone cartoon conv bonds for climate 29Jun23 575x375.jpg

Ever since the dawn of the green bond market, participants have wondered: “One day, will all bonds be green?”

That is a long way off. But we are getting closer to a point that is much more relevant for humanity’s struggle with the climate and biodiversity crisis: when all bonds are transition bonds.

This week NatWest published a survey of 225 asset managers’ attitudes to a range of environmental, social and governance issues.

Investors were asked: “What bond structures do you think are most helpful for reaching net zero goals and mitigating physical risk?”

They were invited to rank green bonds, sustainability-linked bonds, green securitization and conventional bonds.

This looked like a face-off between green bonds and SLBs — but no. Top of the charts as helpful for reaching net zero goals, picked as one of the best options by 80% of investors, was conventional bonds.

They were also ranked the very best tool of the four by 28%, more than any of the labelled instruments.

And for physical risk, 84% of investors picked conventional bonds, again the highest share. In both cases the view was common across north America, Europe and Asia Pacific.

There is still a place for labelled debt. After all, about three quarters picked one of those instruments as best.

But the survey hammers home a crucial truth: conventional bonds are essential to financing the world’s escape from climate disaster. What’s more, investors now realise it.

As NatWest points out, labelled debt reached $3.8tr at the end of last year, but this is still only 5% of the global bond market.

All the issuers of all the bonds need to become sustainable, throughout their operations.

The fixed income market has taken a long detour through thickets of detail about sustainably labelled instruments. It is now back where it started: facing a mammoth, unsustainable bond market.

The tool for making it sustainable will not be a special structure or a modest tilt to greener debt. It will be a strident demand to issuers: go green or we're out.