Bonds have traditionally been an integral part of many investment portfolios because of their relatively low risk, their capital preservation, and their major role as a diversification tool. The stable interest income also attracts investors, although it has not been high in recent years, sometimes even negative, due to global monetary policy. However, it is a category that most investors cannot ignore. According to Schreuder: "A well-diversified investment portfolio for wealth accumulation often consists for a large part of bonds.”  

After equities, bonds have increasingly come under a green magnifying glass, Schreuder argues. Investors can now choose between bonds with different sustainable labels from green and ESG-linked bonds to social bonds and microcredit loans. Schreuder: "Investors must be aware of the differences because every choice has consequences. Does a type of bond, and does the particular issuer suit you? Is the investment sustainable enough, or perhaps just a little too green for what you want to achieve? And what impact do you want to achieve?”

Don’t be blinded by a sustainable label 

Rosl Veltmeijer agrees with Schreuder that investors should take a good look under the bonnet of a bond, including bonds with a sustainability label. "The issuance of green bonds is increasing rapidly, with more and more issuing governments and companies. This is good news in itself, but investors should always be aware that there can be significant differences between the sustainability of the various issuers of these bonds and the type of activities financed with the capital raised", says Veltmeijer. “Moreover, not every green bond will necessarily generate positive impact.”

Even with guidelines such as the EU Green Bond Standard, Veltmeijer says investors must be vigilant about greenwashing. "What about an oil company that issues a green bond for a few windmills but does not change the core of its business model? In a Triodos portfolio, this type of bond would not be included because Triodos Investment Management not only analyses the bond itself but also the issuing company.” 

Veltmeijer argues that there are various degrees of impact. Every investor needs to study this beforehand. Triodos Euro Bond Impact Fund, which invests in a mix of sustainable European government and corporate bonds, takes impact a step further than most other bond funds. "We select bonds based on strict positive and negative screening to only invest in companies that actually contribute to a sustainable economy. That's where we stand out. In doing so, we look at the company's contribution to our seven transition themes: sustainable food and agriculture, sustainable mobility and infrastructure, sustainable resources, circular economy, welfare and health, sustainable innovation and social inclusion." 

Engagement: a powerful tool for impact

Schreuder: "Engagement is a powerful tool to make an impact. That is something that bond investors should also work with and are increasingly doing. A challenge is that there are no uniform methods to measure this impact properly. However, it all starts with investors who know which way they want to go with this, that they make conscious choices about the impact they want to make; that is the driving force in financial markets.” 

Investors in bonds are too quick to think that they have no impact or influence on companies. Schreuder says: "It is a misconception that companies only listen to shareholders. Many companies issue bonds every year and must then enter into a dialogue with bond investors. By being transparent about ESG-related issues, companies maintain access to this important source of financing. For investors, this is a moment where they can exert influence."  

While rigorous screening is key at Triodos Investment Management, the asset manager is also active in changing companies through engagement. “In addition, we also look at whether specific green (or social) bonds continue to meet the sustainable conditions. Does a green bond really contribute to the company's sustainable strategy? Does a bond contribute to the strategy of the company? What are the company's other activities? What is the future vision of the company? Even with sustainable companies, there is still plenty of room for improvement through engagement", says Veltmeijer. 

Both experts argue that the impact of a green bond, where the proceeds are used for a specific sustainable purpose, is not necessarily better than a traditional corporate bond. Veltmeijer: "You have to look through the sustainable label and it may turn out that the positive impact of a traditional bond is greater. You must do some homework as an investor. We prefer to invest in a ‘standard’ bond issued by a sustainable company. After all, that makes the bond sustainable, and you are supporting the sustainable business model of an entire company. An additional advantage is that we also bring more diversity to our bond portfolios."