Global fixed-income investors will be allocating more to ESG bonds despite some liquidity concerns, according to a study released Tuesday by Coalition Greenwich.
The analytics firm interviewed 111 senior buy-side fixed-income portfolio managers, traders and analysts around the world between July and August 2022 to get a sense of the likely path ahead for ESG's impact on this market.
The responses showed strong demand for sustainability-linked and use-of-proceeds bonds like green bonds and social bonds, with 94% of the institutional investors "embracing" ESG-labeled bonds, said Stephen Bruel, senior analyst at Coalition Greenwich Market Structure and Technology, in a release on the study.
There were two main reasons cited for the increasing allocations to ESG-labeled bonds: the institutions' own corporate values, and pressure from stakeholders, while 49% of respondents said it was for the performance.
"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," said Mr. Bruel, author of the study report, The Continued Maturation of Fixed-Income ESG Investing.
Whether the market can support the demand is another matter. More than 60% of institutions participating in the study cited liquidity in ESG-labeled bonds as sometimes falling short, and a quarter of them described liquidity as insufficient.
Despite those concerns, "the entrance of new investors and the maturation of the market structure should alleviate these worries over time," said Mr. Bruel, who noted that high-yield, municipal and other bond subsegments have had their own liquidity challenges over the past year, with investment-grade issuance down 15% and high-yield issuance down 76%, the report noted.
"The ESG bond market was not immune as issuance fell," the report said, but ESG bonds as a share of overall fixed-income issuances rose to 12% in 2022 from 4% in 2018, which has helped improve ESG infrastructure such as data and analytics, the report said.