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AB Explains ESG-Labeled Bonds: Quality Over Quantity
AB Explains ESG-Labeled Bonds: Quality Over Quantity
Published 08-22-24
Submitted by AllianceBernstein
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.
AllianceBernstein
AllianceBernstein
AllianceBernstein (AB) is a leading global investment management firm that offers diversified investment services to institutional investors, individuals, and private wealth clients in major world markets.
To be effective stewards of our clients’ assets, we strive to invest responsibly—assessing, engaging on and integrating material issues, including environmental, social and governance (ESG) considerations into most of our actively managed strategies (approximately 79% of AB’s actively managed assets under management as of December 31, 2024).
Our purpose—to pursue insight that unlocks opportunity—describes the ethos of our firm. Because we are an active investment manager, differentiated insights drive our ability to design innovative investment solutions and help our clients achieve their investment goals. We became a signatory to the Principles for Responsible Investment (PRI) in 2011. This began our journey to formalize our approach to identifying responsible ways to unlock opportunities for our clients through integrating material ESG factors throughout most of our actively managed equity and fixed-income client accounts, funds and strategies. Material ESG factors are important elements in forming insights and in presenting potential risks and opportunities that can affect the performance of the companies and issuers that we invest in and the portfolios that we build. AB also engages issuers when it believes the engagement is in the best financial interest of its clients.
Our values illustrate the behaviors and actions that create our strong culture and enable us to meet our clients' needs. Each value inspires us to be better:
- Invest in One Another: At AB, there’s no “one size fits all” and no mold to break. We celebrate idiosyncrasy and make sure everyone’s voice is heard. We seek and include talented people with diverse skills, abilities and backgrounds, who expand our thinking. A mosaic of perspectives makes us stronger, helping us to nurture enduring relationships and build actionable solutions.
- Strive for Distinctive Knowledge: Intellectual curiosity is in our DNA. We embrace challenging problems and ask tough questions. We don’t settle for easy answers when we seek to understand the world around us—and that’s what makes us better investors and partners to our colleagues and clients. We are independent thinkers who go where the research and data take us. And knowing more isn’t the end of the journey, it’s the start of a deeper conversation.
- Speak with Courage and Conviction: Collegial debate yields conviction, so we challenge one another to think differently. Working together enables us to see all sides of an issue. We stand firmly behind our ideas, and we recognize that the world is dynamic. To keep pace with an ever changing world and industry, we constantly reassess our views and share them with intellectual honesty. Above all, we strive to seek and speak truth to our colleagues, clients and others as a trusted voice of reason.
- Act with Integrity—Always: Although our firm is comprised of multiple businesses, disciplines and individuals, we’re united by our commitment to be strong stewards for our people and our clients. Our fiduciary duty and an ethical mind-set are fundamental to the decisions we make.
As of December 31, 2024, AB had $792B in assets under management, $555B of which were ESG-integrated. Additional information about AB may be found on our website, www.alliancebernstein.com.
Learn more about AB’s approach to responsibility here.
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