On 9 September, Triodos IM hosted the webinar, “Elephant in the room: the role of listed fixed income in scaling impact investing”, facilitated by Adam Robbins, Triodos IM’s Investor Relations Manager for the UK. It looked at what it means for listed fixed income investors to incorporate impact outcomes in their investment decisions, and how the asset class can be a driving force for social and environmental change. The session provided insightful and open discussion that piqued the interest of an engaged audience.

The session began with Robbins welcoming the audience and speakers and setting the scene by telling of the UK’s increasing demand for sustainable finance and investment options. Campaigns like Make My Money Matter are raising awareness amongst pension fund beneficiaries. However, he also highlighted that impact investment amongst fixed income investors is relatively low compared with other asset classes.

Market status

Carmen Nuzzo, Head of Fixed Income, UN PRI, then spoke, and talked about the current market status:  there are extremely limited product/fund opportunities in the asset class for asset owners to invest for impact; and at present the focus tends to be on high-profile transition bonds, and green and social bonds. There are three key reasons why she believes this is the case:

• Asset class complexity (different issue types, coupon structures, and maturities);
• Lack of voting rights and a non-engagement culture (little influence over company strategies); and
• Limited academic research and market evidence.

Looking to the future, Nuzzo said that the fixed income market is now at a very interesting and creative stage, with the focus of investment decisions gradually shifting away from a pure risk-return approach towards an approach the PRI calls “real-world outcomes”. Increasing numbers of fixed income investors are realising that ESG considerations can play an important role in assessing risk, that there is increasing client demand, that fiduciary duty is evolving to include environmental and social value, and that regulatory pressure is on the rise.

Market developments

Jack Heapey, Senior Associate, Phenix Capital, then shared insightful survey results and his view on the where the market heading. He told that Phenix has tracked more than EUR 245 billion in the impact fund market over the last 15 years, across 1,300 impact investment funds, across asset classes, with an average fund size of EUR 169 million. Just 6% of funds launched were within the listed fixed income space. The results also show that there are currently 562 impact funds raising capital, with more than EUR 100 billion being raised in the private market, with only 5% of the funds being raised for listed fixed income products.

Although the impact-focused listed fixed income market is very small, there are currently 47 funds and 36 managers that have institutional impact funds, with more than EUR 13.8 billion committed capital. The last five years witnessed year-on-year growth in the launch of fixed income impact funds, and fixed income is the second highest in-demand asset class from institutional investors (largely due to  the composition of pension scheme portfolios).

Heapey believes that the outlook is positive and rising, and sees opportunities for investors to: expand their financing towards the addressing the climate crisis, in strategies that comprise green and climate bonds issued by sovereigns, municipalities, multi-lateral organisations, financial institutions and corporations. He believes fixed income is compelling for institutional investors because it provides: access to under-represented areas of the impact investment universe; lower management costs, which can create a lower barrier to entry; and diversification of risk assessments for asset allocation of private market impact investments.

Triodos Euro Bond Impact Fund

Jeroen van Herwaarden, Fund Manager of Triodos Euro Bond Impact Fund, was the last to speak. He told how Triodos IM is filling a critical gap in fixed income impact investment, and that the market is gaining traction and getting easier. In particular, the market for sovereign green bonds is growing, and providing more choice for strong portfolio impact management. Van Herwaarden described the multi-step selection process Triodos IM applies, which involves impact analysis, exclusion criteria and financial performance, and engagement with issuers also key. The impact analysis takes a thematic approach, looking at seven transition themes that respect ecological boundaries and work for the benefit of all. The impact must align with at least with one theme, and each theme is linked to one or more of the SDGs. In terms of portfolio construction, Van Herwaarden says Triodos IM looks at the impact of the issuer and/or the intended impact of the proceeds, at various bond types, including corporate, semi-sovereign (such as development banks), and government bonds, and at the type of issuance, if it is standard or designated impact.  

Ultimately there was a clear call to action for asset owners to engage with asset managers and index providers about their objectives and the impact they want to achieve, and for beneficiaries to demand far more from their investment.