Financial advisers see rise in client demand for ESG bonds, study finds

Financial advisers are reporting a rise in interest from clients in bonds that focus on environmental, social and governance (ESG) factors, according to new research published by Aviva Investors.

The findings from the asset management business of Aviva revealed that 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 study, based on findings from a panel of 100 UK based professional financial advisers, suggested that the momentum towards ESG integration is such that 62% of advisers believe the conventional ‘brown’ bond market will be completely green by 2040. This includes 3% who expect it to happen by 2025, 35% who say by 2030 and 24% who cited 2040 or later. Only 38% said this will never happen.

Two thirds (67%) of respondents also said 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%).

“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,” commented Aviva Investors head of UK wholesale, Apiramy Jeyarajah.

However, the study also indicated that advisers are seeing some barriers to their clients investing in ESG-linked bonds. The greatest obstacle is a lack of education and understanding about these instruments, which was cited by 54% of advisers.

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%).

Jeyarajah added: “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.”

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