ESG in Fixed Income Americas conference: Highlights

By Ahren Lester

The in-person conference attracted more than 300 delegates and continued to demonstrate the growing momentum for sustainable finance in the region, writes Ahren Lester

With more than 60 expert panellists across 13 sessions, the New York event provided diverse insights on topics ranging from greenwashing to the US Inflation Reduction Act and sustainability-linked and social bonds to asset-backed securities.

Ahead of the Asia event in the series taking place in Singapore on 3 November, here is a round-up of some of the fascinating themes discussed over the course of the Americas event.

Sustainability-linked bonds

A recurring theme of the conference was the mix of excitement and trepidation in the market around sustainability-linked bonds.

Alliance Bernstein fixed income responsible investing portfolio management director Tiffanie Wong said the SLB market was the "Wild West" of the ESG fixed income space. Nonetheless, she said recent efforts to provide more structure to the market so far are a "good start" to rectifying this concern.

For example, she pointed out that the International Capital Market Association (ICMA) – which administers the Sustainability-Linked Bond Principles – has published a key performance indicator (KPI) registry and provided additional guidance around SLB structures such as around call dates.

"All these are good things and a good start, as I think it gives a more structured framework for both issuers and investors to look at the space," she said. "Ultimately, at least in the near term, I think it might actually pump the brakes a little bit on SLB issuance relative to use-of-proceeds bonds. But that is not necessarily a bad thing, it means that the standards have been elevated."

There was also a lot of discussion around the inclusion of step-downs as well as step-ups in SLB structures. Currently, the SLB market has tended to focus on step ups – increasing the coupon if targets are missed – but there is growing interest for step-downs to feature. In September, for example, Uruguay laid the groundwork for issuing the first sovereign SLB to adopt a bi-directional pricing structure.

Pinebridge Investments sustainable investing, portfolio strategy and risk managing director Alessia Falsarone believes it is sovereign issuers – such as Uruguay – that could prove key catalysts for greater use of step downs in SLB structures.

"I think it is important for sovereigns and supranational entities to take that to heart and pretty much open that sector with step-downs, for the reason that they have a lot more visibility on monetary strategy and on their new development model that we should all be thinking about – especially in emerging market economies," Falsarone said.

Scope 3 emissions

Scope 3 greenhouse gas emissions also faced scrutiny. Nuveen global ESG fixed income head Steve Liberatore said Scope 3 emissions data is going to be hard to get for a long period of time as it is "extremely complicated" with plenty of potential for issues around double counting and missing data. At present, he said that Scope 3 emissions data is "effectively garbage".

Nonetheless, Morningstar Sustainalytics sustainable finance associate director Mayur Mukati emphasised that issuers do not need to look to address all 15 Scope 3 emission categories identified in the GHG Protocol through their sustainability-linked bond framework.

He emphasised focus should be on finding "emissions hotspots" at firms and ensuring that their data coverage is appropriately extensive.

"If [we have metrics covering] Scope 1 and 2 for oil and gas, and it is just covering 5% of their emissions – that is a completely different conversation from a chemicals company covering Scope 1 and 2 with 25% of emissions coming from that. So, I think it is about the coverage of emissions more than the Scopes."

Sustainable bonds

There was also a lot of support for sustainable bonds – a hybrid of green and social bonds – in the context of rising interest in the 'social' aspect of ESG since the Covid-19 pandemic.

Nuveen's Liberatore said most issuers have now shifted to publishing sustainable bond frameworks, rather than specific green or social bond frameworks.

Amid the rising prominent of sustainable bond frameworks, World Bank sustainable finance senior financial officer Scott Cantor believes this will increasingly feed into actual issuance trends. Indeed, over the medium- to long-term, Cantor believes all bonds will become sustainable bonds.

According to Environmental Finance Data, the World Bank was one of the first green bond issuers in in 2008. After issuing its first sustainable bond in 2016, however, it has raised more each year from sustainable bonds rather than green bonds since 2019.

Although still nascent, Nuveen's Liberatore said the social element of these frameworks have also increasingly moved away from the initial Covid-19 relief focus.

What is more, although "easier" social use-of-proceeds categories like affordable housing are being recognised, he said issuers are also seeing opportunities in newer areas such as increasing broadband access to rural areas.

"The social market is especially nascent," Liberatore said. "So, right now, it is just a matter of trying to feel out where there is an opportunity from an issuer perspective and be able to provide that financing where the issuer feels as though they have some competence."

Morningstar Sustainalytics debt capital markets and sustainable finance director Lindsay Brent said she would "encourage" companies considering a green bond to "consider adding a social element" to their framework.

"I think corporates want to step more into the social space, they just are not quite sure how to do it," Brent said. "We need corporates to take a risk: they know their context, they know their markets and their communities. They know what kind of impact is necessary, and they can be leaders in that space.

"So, I would encourage corporates who are considering doing a green bond, to think about adding some social use of proceeds categories."

Brent also argued that issuer concern around the relatively heterogeneous environment for social data should not stop them coming forward with proposals, and greater issuance should shake out key data points for the market.

For example, she said discussions over lunch at the event flagged up the lost time injury frequency rate (LTIFR) as a standardised social metric that can be taken and used by any industry in any country and will be generally recognised.

"So if there is one, there can be others," she said. "These things come out of collaboration, discussion, innovation and [actual bond issue] attempts. So I would say we have seen some really exciting things in the social space in the last few years. And as soon as there is one really great example, others want to come in and start a conversation there.

"So, harmonisation – there are some great resources out there – but we have got more ways to go. But I think it just takes time and conversation and patience, as taking a chance at trying something different."

US muni bonds

Within the US municipal bond panel, there was also growing excitement about some of the shifts taking place in this sizeable if often overlooked segment of the market which could attract great international institutional investor attention.

Breckinridge Capital Advisors municipal research senior analyst Ruth Ducret emphasised how new sustainable bonds are in the US muni market compared to global corporate markets, and there remains some confusion around what a sustainable bond actually is.

"Disclosure must be front and centre in the offering statements in the bond documents, but it is not always necessarily the case," she said. "In the market, you can still see a lot of issuers say their bonds are green and that is literally the only place in the entire OS you will see the word 'green'. So, that is not really meaningful. As an investor, I want to see more background."

She said that over the last few years, however, she was seeing more and more "coalescing" around common sustainable bond principles in the market. In particular, she said that US muni sustainable bond issuance which is aligned with the ICMA-administered principles is up 30% in 2022 to date compared to the same period in 2021.

"That is really good considering current market conditions where you have seen overall less issuance [in 2022]," she said. "So it is just interesting to know that the momentum is there, and it is building."

Stifel public finance managing director Jeremy Newtson believes that sustainable bond issuance could reinvigorate international investor interest in the US muni bond market which has declined in recent years.

"Years and years ago, there was more of European and other international demand [for US muni bonds]," he said. "I see no reason why an ESG-focus could not start that again."

As well as benefitting issuers with broader investor bases and potentially better pricing, he believes this would also prove valuable to international investors.

"It would benefit the investors as well to have that exposure to a very safe, very stable US municipal market which pursue a lot of these green initiatives that are very difficult to accomplish on the corporate side," he said.