In the first five months of 2022, investors invested US$54 billion in bond funds that specialize in environmental, social, and governance issues, although concerns about potential “greenwashing” have escalated.

After a few years big sale According to data compiled by data provider Morningstar, investors are now turning their attention to fixed income funds in stock products that focus on ESG.

As of the end of May, the total sales of all ESG bond funds reached 54 billion U.S. dollars, and the full-year sales in 2020 were close to 68 billion U.S. dollars. The data covers global open-end funds and exchange-traded funds.

Between January and May, the assets under management of these products increased by 14% to $374 billion, and nearly tripled in three years. In 2020 alone, assets have soared by 66%, while assets in the entire fixed income fund sector have increased by 12%.

The soaring demand has driven the launch of new funds, and companies and governments have also launched a large number of social bonds and green bonds to cater to this trend. But growing interest has raised concerns about so-called “greenwashing”, including concerns that some bond funds are not as sustainable as they claim, and that fund managers find it difficult to decipher their ESG certificates.

Morningstar deputy director Jose Garcia-Zarate stated that “the obvious trend is conducive to ESG growth, especially in Europe”, but many fund managers are working to solve “how to apply ESG principles to certain bond markets”. He said that trying to label government bonds with ESG standards proved to be “very, very tricky” because “there is still no consensus on how to classify governments and countries.”

Garcia-Zarate said that the demand for ESG bond funds is concentrated in Europe, but other regions are also beginning to show interest. In the United States, sales of ESG bond funds in the first five months of 2022 were US$4.75 billion, compared with US$5.92 billion for the entire year.

There is also growing demand for passively managed ESG bond funds, which usually track indexes. According to Morningstar, more than US$17 billion has been invested in these products this year, surpassing last year’s record of US$15.6 billion.

Colin Purdie, Chief Investment Officer of Aviva Investors Liquid Markets, recently launched a bond fund focused on climate transformation. He said: “ESG momentum is everywhere… Not surprisingly, we see the launch of the fund coming soon.”

Morningstar data shows that 122 new ESG bond funds were launched last year, and there are 44 new products in the first quarter of 2022.

But Purdie added that in terms of ESG, fixed-income investors are facing challenges​​: “There is a view that ESG in stocks is easier, and one of the reasons is data,” he said.

In areas such as high-yield or emerging markets, which are generally considered more speculative investments, data disclosure around ESG remains a problem. “Credit has higher resource requirements to ensure that you have the information you need,” he said.

Despite this, issuers have been racing to launch new sustainable debt. According to data from Bloomberg New Energy Finance, US$245.3 billion in green bonds, US$83.8 billion in sustainability bonds and US$129.2 billion in social bonds have been issued this year. In contrast, in the five months to the end of May 2020, US$91.44 billion in green bonds were issued, along with US$15.21 billion in sustainability bonds and US$27.87 billion in social bonds.

The histogram of net assets under management (billions of US dollars) shows that bond funds capitalize on the ever-unsatisfied ESG appetite of booming investors

Brin Jones of the Rathbone Ethical Bond Fund, one of the oldest and largest ESG fixed-income funds, said that during his 17 years of managing the fund, the supply of green and social bonds has “increased significantly”.

He said that the demand for ESG bond funds is driven by a number of regulations, such as the UK’s efforts to allow pension funds to consider the impact of ESG on investment, and new investor groups such as millennials and young investors. Interested to see that their money is good and generates returns.

According to Morningstar, despite the rapid rise in demand for ESG bond funds, they still account for less than one-fifth of the total assets of sustainable funds.

A May survey of Nordic and Dutch investors by NN Investment Partners found that nearly half of the respondents said that green bonds are their preferred fixed income option. About 81% of Nordic and Dutch pension funds stated that they have invested in green bonds.

However, the interviewees also expressed concern about the company’s “green washing”, saying that this is the biggest obstacle to investment.

Simon Bond, director of portfolio management at Columbia Threadneedle Investments, said that although issuers have been accused of doing so in some cases, the problem is not widespread. But Bond added that the growing interest in green bleaching is positive.

“This is a good thing. It shines a light in that dark corner. When you see the light in this corner of ESG, it’s hard to hide,” he said.

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