Sustainable Finance & Socially Responsible Investment

AB Explains ESG-Labeled Bonds: Quality Over Quantity

Aug 21, 2024 8:45 AM ET
Campaign: Responsible Investing
Info graphic bar chart "ESG-Labeled Bonds Total Issuance vs. AB Strength Score.
Past performance does not guarantee future results. AB ESG-labeled bond strength score represents a proprietary analysis of ESG-labeled bonds 12 months after they were issued. The rating is based on the bonds’ stated targets and progress towards those targets. A higher score reflects a stronger ESG-labeled bond. Scores shown above are the market average for each vintage year. Through December 31, 2023 Source: Bloomberg, LGX Datahub and AB

ESG-Labeled Bond Issuance Has Declined, but Quality Has Improved

After a rapid ascent, issuance of ESG-labeled bonds has fallen back recently, even as we’ve observed that the overall quality of the market has improved (Display). That’s an intriguing combination—with an explanation.

We’ve analyzed over 11,000 ESG-labeled bonds, comparing each bond’s stated intentions at the time of issue with actual performance 12 months later (for example, how the bond’s proceeds were allocated across different projects, and the ESG impact of those projects).

Using three criteria—disclosure, plus ambition of and credibility versus targets—and employing more than 20 underlying factors with different weightings, we calculated a quality (or strength) score for each bond, enabling us to compare them across issuers, universes and vintage years.

The surge in strength scores aligns with our experience: weaker issues are coming to market less frequently, so the overall quality of the new-issue market is rising and greenwashing seems less of an issue. We also believe that much of the improved strength is a result of diligent active investors guiding issuers to develop stronger ESG-labeled bond structures.

Our own engagements* offer examples. A global utility company issued sustainability-linked bonds (SLBs) with ambitious targets, which it missed. Our discussions with management revealed the reasons were both temporary and outside their control. We commended their ambition and supported further SLB issuance. Also, a European consumer company’s SLB targeted substantial scope 3 emissions reductions—even though many peers only disclose scopes 1 and 2.

*AB engages companies where it believes the engagement is in the best interest of its clients.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.

Learn more about AB’s approach to responsibility here.

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