The evidence that bonds with a socially responsible investment (SRI) label are priced, and trade, richer than their vanilla counterparts is mounting. While the numbers involved may still be too small to be statistically significant, the conclusion that labelled bonds tend to be more expensive than conventional bonds should not surprise anyone.
The supply-demand dynamic is overwhelmingly in favour of the seller and, with dedicated SRI funds springing up every day, how could it be otherwise?
The fabled millennials are said to be almost twice as interested in sustainable investing as the generation before them. This dynamic looks likely to tip further in favour of the suppliers each year.
Admitting that this pricing advantage is a good thing has been taboo until now. Without some pricing acknowledgement of the SRI label, issuers are disincentivised from selling green bonds by the costs of reporting on the impact of their use of proceeds.
The point of the green bond market should be to encourage issuers to fund environmentally friendly projects by lowering the debt burden they take on for doing so.
If investors are serious about committing to addressing climate change and social issues, then this commitment must be tangible and reflected in the funds’ returns. Simply allocating a portion of cash to sustainable projects indicates nothing about the investor’s commitment to sustainability aims that cannot be explained by virtue signalling.
There are benefits to being an ethical investor — such as enhancement of reputation, a moral high ground and a healthier planet — but they have to be paid for.