Due in part to the COVID-19 pandemic, some of the fastest-growing sectors of the current bond market are purpose-driven.
After a record first half of global issuance of sustainable bonds, bond-rating agency Moody’s Investors Service reported that it expects $850 billion worth of new green, social, and sustainability bonds to hit the market for all of 2021. That adds to the $502 billion of new issuance in short- and long-term municipal (muni) debt, which frequently promotes localized support for economic, education, social, and health projects.
“We seem to be gaining critical mass as green, social, and impact bonds become household names and more investors and issuers are comfortable with them, which leads to more liquidity in the space and more places to turn,” said John Church, Glenmede’s director of endowment and foundation impact portfolio management. “For investors trying to figure out how to invest in this space, many of these bonds represent low-hanging fruit as they offer impact in a fixed-income market that otherwise offers lackluster returns.”
Overall, Moody’s anticipates that sustainable bonds will account for 8%–10% of the world’s bond issuance in 2021 as more sustainability-minded organizations tap the global debt markets.
Green Sustainability Bonds Set the Pace
The largest piece of the sustainable bond market is green bonds, which are issued by corporations and public organizations to support climate and environmental initiatives.
Among prominent government green-bond issues announced earlier this year are a $19 billion green bond by Singapore and a £15 billion offering by the UK—the latter’s first sovereign green bond. Recent corporate issues include a $900 million issue by Big River Steel, an Arkansas-based steel producer committed to minimizing its carbon footprint, as well as a $1 billion offering from multinational banking firm JPMorgan Chase.
Moody’s forecasts that new issues within the space will total $200 billion in 2021. The $1 billion sustainability-focused bond offering from Amazon announced in May 2021 marks just one major example.
“As this space grows, it’s important for investors to remain cognizant of what they—and the issuer—are trying to achieve, and getting beneath the surface of any offering to assess what it’s really targeting,” Church said.
Social Bonds Begin to Soar
The slice of the bond finance market with the most growth is social bonds, which support projects with clearly defined social impact targets. In a more than seven-fold jump from the $20 billion issued in 2019, social bonds saw $148 billion worth of new issues in 2020.
According to S&P Global Ratings, the surge was driven largely by pandemic-focused issues and further enhanced by large foundations, which issued bonds to raise cash and extend their grantmaking capacity for social justice issues in the wake of fresh community wounds such as the murder of George Floyd. The Ford Foundation broke the mold by issuing $1 billion worth of the bonds, and four additional organizations immediately followed by raising more than $700 million.
Although prominent foundations raised $3 billion through social bond offerings, Church expects midsized and smaller entities to tread carefully around such commitments: “There are a lot of questions around what you give up down the road to give more now, especially when a foundation can increase its distribution beyond 5% or invest its endowment more impactfully.”
Municipal Bonds Also Extend Impact
Although growing awareness of—and soaring demand for—sustainable debt has swept through global bond markets, municipal bonds continue to offer targeted opportunities to invest at the state or local level. Industry group SIFMA projects $452 billion worth of long-term municipal bonds will be issued in 2021, aided by different market drivers. This would mark a drop from the $467 billion that hit the market in 2020.
Yet SIFMA anticipates that the issuance of taxable municipal bonds, which do not qualify for federal tax breaks, will rise in 2021 to total $145 billion. This represents 32% of the year’s total long-term issuance—a 10-year high. Church said taxable municipal bonds frequently raise money for targeted projects that have potentially higher impacts on local communities.
“The scope of taxable muni offerings can be surprisingly narrow, but they do provide clear insight into what’s being funded and its likely impact,” he said.
Continued Growth Likely, Albeit with Caution
Finding positive developments within the pandemic has been a struggle, especially as variants erode gains toward normalcy. However, this crisis has raised awareness of at-risk populations. In turn, organizations, foundations, and individuals have pushed for rapid changes that highlight the impact that well-placed investments can have on struggling communities.
Sustainable debt’s profile continues to grow in the broader bond market. Yet Church cautions that risks may rise as well, especially once rates start rising from historical lows. “We’ve been in a period where you can virtually do no wrong in fixed income, but that won’t always be the case—so investors must do their homework on the financials, the impact, and the accountability,” he said. “But I believe we’ll see sustainable bonds continue to grow as investors weigh the impacts of investing in US Treasuries or corporate bonds versus green bonds, social bonds, and muni bonds.”