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.