Financial advisers see growing client demand for ESG bonds finds Aviva Investors’ research

  • Sustainability-linked bonds most likely to be used to meet this growing demand
  • Majority of advisers believe the conventional ‘brown’ bond market will be completely green by 2040
  • Greatest obstacle for ESG/green bond investment is a lack of education and understanding

Financial advisers have confirmed rising or stable interest from clients in bonds that focus on Environmental, Social and Governance (ESG) factors, according to new research1 from Aviva Investors, the global asset management business of Aviva plc (‘Aviva’). More than two in five (43%) advisers are seeing an increase in demand for such bonds, while 56% say that the demand is constant.

The momentum towards ESG integration is such that 62% of advisers believe the conventional ‘brown’ bond market will be completely green by 2040, including 3% who expect it to happen by 2025; 35% who say by 2030 and 24% who cite 2040 or later. Only 38% say this will never happen.

Two thirds (67%) say the investment vehicles most likely to be used to meet the growing appetite for ESG-linked fixed income are sustainability-linked bonds, which pay investors higher coupons if they fail to meet sustainability targets. Other types of vehicles cited by respondents include traditional bonds issued by companies with sustainability credentials and proven to do no harm (44%), climate bonds (22%) and green bonds (19%).

The primary driver of advisers’ interest in allocating more capital to ESG bonds is their belief that it is the right thing to do (38%), ahead of the belief that it will deliver better long-term returns (21%) and a lack of better opportunities in conventional bonds (17%).

Advisers see some barriers to their clients investing in ESG-linked bonds, however. The greatest such obstacle is a lack of education and understanding about these instruments, which was cited by 54%. Other factors include a lack of standardisation or transparency around ESG and green bonds (31%) and a lack of interest owing to ESG criteria being regarded as a short-term fad (17%).

Apiramy Jeyarajah, Head of UK Wholesale at Aviva Investors, said:

“Wholesale investors care about how their money is being invested and increasingly want to see their funds put to use in support of sustainable businesses that will benefit the environment and society, as well as deliver a good return. The business and investment case for responsible investment is hard to dispute these days, but with a wide variety of instruments coming to market, advisers must take a holistic view of the companies that are issuing them. Companies that conduct their business in a truly sustainable way are more likely to succeed over time, but bad or incomplete practices don’t just hit the headlines, they hit the bottom line as well.”

1 Research conducted by Citigate Dewe Rogerson amongst a panel of 100 UK based professional financial advisers in April and May 2021.

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