April 4, 2023 | Stamford, CT — Institutional fixed-income investors around the world plan to increase allocations to ESG bonds in the next two years.

More than 90% of the global fixed-income investors participating in a new study from Coalition Greenwich plan to expand allocations to ESG-labeled bonds. That result points to strong demand from the buy side for sustainability-linked and use-of-proceeds bonds like green bonds and social bonds. 

“The fact that institutional investors are almost unanimous in their embrace of ESG-labeled bonds should provide a boost of confidence to the organizations and firms working to build out the infrastructure for sustainable investments,” says Stephen Bruel, Senior Analyst at Coalition Greenwich Market Structure & Technology and author of The Continued Maturation of Fixed-Income ESG Investing.

However, even institutions planning to expand allocations to ESG-labeled bonds are not entirely convinced that the market today is fully ready to support the demand. More than 60% of institutions participating in the study believe liquidity in ESG-labeled bonds sometimes falls short of what’s needed, including a quarter of the investors who describe liquidity in these products as “insufficient.”

“Although concerns about liquidity remain, the entrance of new investors and the maturation of the market structure should alleviate these worries over time,” says Stephen Bruel, who notes that ESG-labeled bonds are hardly alone when it comes to recent liquidity issues. Over the past year, high-yield, municipal and other bond sub-segments have experienced their own liquidity challenges. 

Why are institutions investing in ESG bonds? 
Institutions are increasing allocations to ESG-labeled bonds for two main reasons: to align with their own corporate values, and in response to pressure from stakeholders. However, almost half of respondents in the study say they are investing in these products for the performance. 

“Given the obligation to generate returns, asset managers believing that the performance can be positive is another encouraging sign that one does not have to sacrifice returns to achieve other goals,” says Stephen Bruel.  “Even still, yields remain vital and if ESG bonds do not perform then portfolio managers will be forced to look elsewhere for returns.”

The Continued Maturation of Fixed-Income ESG Investing analyzes important trends in fixed-income ESG investing, including the types of ESG-labeled bonds available to investors, demand for sustainable fixed-income products, ESG investment strategies offered by global asset managers, and the role ESG products are playing in institutional investment portfolios.