2022 ended on an uncertain note, with a significant dip in the markets, rising inflation, and aggressive monetary tightening actions on a global scale. However, prioritization of sustainability and ESG continued to grow in both the private and public sectors. Now, as the first half of 2023 comes to a close, we have been seeing relatively steady growth in both the markets and ESG trends.
While 2022 ended with negative returns for most indices, the first half of 2023 has provided positive returns for green and non-green indices alike – with better returns for some ESG funds versus their benchmarks. Last year’s inflation also led to high borrowing costs and a slowdown in issuing of corporate bonds. However, as borrowers, consumers, and investors alike continue to prioritize the global transition towards sustainability and ESG, green bonds are on track to reach an all-time high of around $600 billion in sales this year.
At EGEA SRI, we firmly believe you can have both positive impact and profits – as long as you know where to put your money. Read on to find out more about 2023’s financial ESG trends and the research that’s been on our radar!
Mid-Year ESG Trends: Returns
The first half of 2023 came with positive returns for many indices despite hardships in certain sectors, and many ESG indices outperformed their benchmark counterparts.
Morgan Stanley Capital International (MSCI), a large U.S. investment research firm, is perhaps best known for their benchmarks and indices. The MSCI All Country World Index (ACWI) is often used by fund managers as a benchmark for the performance of global equity funds. MSCI also has several ESG indices, including:
- MSCI ACWI Climate Change, MSCI ACWI Climate Action, and MSCI ACWI Climate Paris Aligned Indices;
- MSCI ACWI ESG Focus, MSCI ACWI ESG Screened, MSCI ACWI ESG Universal,MSCI ACWI ESG Leaders, and the MSCI ACWI SRI Indices;
- and MSCI ACWI Low Carbon Leaders and MSCI ACWI Low Carbon Target Indices.
According to MSCI’s recent Q1 2023 reports, 8 of the 10 ESG funds listed above outperformed the benchmark MSCI ACWI. They outperformed their benchmark by between .1% and 3.4%. However, it’s also worth mentioning that the 2 funds that did not outperform the benchmark only missed the mark by .1%.
MSCI posits that the out performance was due to a resurgence in specific sectors, namely information technology and consumer discretionary. The negative returns seen in the energy sector may have also played a role.
Reuters reported that, in the first quarter of 2023, “across ESG debt, equity and multi-asset funds, net inflows hit $25.5 billion, the best quarter since early 2022.” The market is still recovering for both ESG and non-ESG assets, and total AUM across all funds, ESG or not, are lower than their peak in 2021. However, the flow of ESG equity funds still beat that of non-ESG equity funds, and this research also backed up the claim that, on a larger scale even beyond the MSCI funds, ESG equity funds outperformed traditional funds during Q1 2023.
What are Bonds?
Bonds are a type of financial instrument that allows organizations, companies, and governments to borrow money from investors. Essentially, a bond is a promise to repay the borrowed amount plus interest at a future date. Periodic interest payments may be paid along the way. Bonds are typically issued for a specific period of time, ranging from a few months to several years.
What are ESG Green Bonds?
Green bonds, also known as climate bonds, are a specific type of bond that are used to fund environmentally-friendly and climate-related projects. These projects vary widely and include renewable energy initiatives, sustainable agriculture ventures, or projects that reduce greenhouse gas emissions. The World Bank issued the first green bond in 2008 and, in doing so, set the standard for green bond criteria in a collaboration between investors, banks, and scientists. In the last 15 years, hundreds of billions of USD have been committed to global green bonds all over the world.
Green bonds are becoming increasingly popular as investors seek to support sustainable and socially responsible investments. The proceeds from green bonds are used exclusively for environmentally-friendly projects, and they are subject to the same credit risk and financial performance as traditional bonds. They might also come with a tax incentive to enhance their attractiveness to investors.
Typical green bond investors are larger organizations, such as pension funds focused on ESG investing, as they can make monetarily significant purchases of these bonds. However, green bonds are still accessible to individual investors looking to make a positive impact with their dollars through mutual funds and ETFs.
Green Bonds vs. Other ESG Bonds
Green bonds are a type of sustainability bond or ESG bond, which is a catch-all term for any bonds focused on any of the three pillars of sustainability: economic growth, environmental protection, and social progress. Other types of ESG bonds include:
- Social bonds focusing on social justice and change
- Blue bonds dedicated to marine and ocean-based projects
- Sustainability-linked bonds (SLBs), which may not finance certain projects but instead can be used for general corporate purposes with an additional stipulation that issuers pledge to meet certain ESG-related thresholds, such as cutting carbon emissions
2023 ESG Green Bond Trends
2023 is estimated to be the biggest year on record for green bonds.
After seeing huge growth year after year, including over twice the amount of global green bond issuance (over $500 billion worth) in 2021 compared to 2020, there was a small dip in green bond sales the following year in 2022 to just under $500 billion. However, global green bonds sales in 2023 are predicted to be the biggest yet, potentially reaching $600 billion and exceeding the record-setting sales seen in 2021.
Source: Bloomberg article, May 16th, 2023
According to a recent report by Bloomberg, total impact bond issuance (which includes all green, social, sustainability, and sustainability-linked bonds) year-to-date for 2023 is already approximately $370 billion. Green bonds account for approximately $247.5 billion of that, or over two-thirds of all total impact bonds.
According to another recent Bloomberg article, 2023 has been the busiest February and April on record for global ESG bond sales. And for green bond sales specifically, Q1 2023 was the busiest quarter ever, putting 2023 in a great position to smash the existing green bond sales record and show even more growth.
Source: Bloomberg article, May 5th, 2023
Lots of this growth was seen in the public sector, but there was significant growth in the private sector too, including by companies issuing their first green bonds such as Nokia and Comcast Corp and by companies such as Verizon who have issued green bonds for years.
Verizon has been a corporate leader when it comes to green bond offerings. Since 2019, the company has issued five green bonds, each offering 1 billion dollars for a total of $5 billion. The latest green bond offering, settled in May 2023, will be entirely allocated toward renewable energy investments, following in the same footsteps of the company’s fourth green bond as announced in their 2023 Green Bond Impact Report. These offerings fall in line with Verizon’s goal to source 50% of the company’s total annual electricity consumption from renewable energy by 2025 and 100% by 2030.
Egéa SRI – What We Do
Many individuals make a positive difference in the world every day through the choices they make: the products they use, the transportation they take, and the food they eat. For these individuals, there is a clear connection between spending money and supporting products, brands, companies, and organizations. However, there is still a disconnect between financial investments and sustainability; few individuals put the same type of thought and care into their investments choices.
Egéa SRI helps individuals understand that connection and tailor funds to fit their wants, needs, and values. Socially responsible investing is the exclusive focus of Egéa SRI and is at the core of everything we do. We’re especially proud of our chartered sustainable, responsible and impact investing (SRI) counselors, who worked hard to earn this esteemed designation and show their commitment to SRI and ESG every day.
If you’re interested in our investment services or want to learn more about our offerings and our chartered SRI counselors, contact us today to find out how we can help you!
