If you want to invest with ESG (environmental, social, and governance) issues in mind, bonds could provide an opportunity. And according to a report, ESG bonds are set to bounce back this year.
In 2022, central banks around the world increased interest rates to tackle high levels of inflation. This action weighed on credit markets and affected bonds as businesses faced higher costs of borrowing. According to a report in Reuters, this led to ESG bond volumes falling by 22% over the year.
Yet, analysis from Barclays suggests ESG bonds will bounce back in 2023. The bank expects ESG bond sales to grow by 30% this year, with much of the growth being driven by green bonds. This boost was linked to green projects that needed funding as companies start to act on decarbonisation plans.
Many countries and businesses are committing to reducing greenhouse gases in line with wider climate change goals.
The International Energy Agency previously estimated that to reach net-zero emission targets, global energy investment would need to increase from $2 trillion (£1.6 trillion) annually to almost $5 trillion (£4 trillion) by 2030. As a result, there could be plenty of opportunities for investors that are interested in climate issues.
ESG bonds expected to top $460 billion (£371 billion) in 2023
With Barclays estimating that the value of ESG bonds could reach $460 billion (£371 billion) this year after a setback in 2022, you may be tempted to invest in them. However, first understanding how they work and whether they’re appropriate for you is crucial.
Green or ESG bonds work in the same way as regular bonds.
They may be issued by governments or companies that want to raise money. When you purchase a bond, it’s essentially issuing a loan. In return, the government or business will agree to pay you back the value of the loan on a specific date, along with interest payments during the term.
Unlike stocks and shares, bonds don’t give you ownership rights. So, you may not benefit from a company’s growth, but you also won’t be affected as much if the company underperforms. However, there are still risks; if a company is unable to repay the loan, you could lose your money.
You can buy a bond and hold it until it reaches maturity. In some cases, you can choose to sell or buy bonds on a secondary market, where their value fluctuates.
Green and ESG bonds will usually be earmarked for specific climate or environmental projects.
Green bonds will focus on projects that will have a positive effect on the environment. This could include improving energy efficiency, reducing pollution, and protecting ecosystems. ESG bonds may have a broader focus that supports communities and improves governance alongside environmental issues.
If you want your money to have a positive impact on the world, green bonds could seem like a good option. However, as with any investment opportunity, you should consider how they’ll fit into your financial plan.
1. What is your reason for investing?
You should always consider why you’re investing. It not only affects your risk profile but can help you understand your investment time frame too.
Even if a bond suits your risk profile, if it has a 10-year maturity and you would want to access the money in just five years, you should consider alternatives.
Understanding what you want to get out of investing means your decisions can help you reach your goals.
2. What is the risk profile of the bond?
While bonds typically involve less risk than stocks and shares, you still need to consider their risk profile. You can still lose money when investing through bonds and the level of risk can vary between different opportunities. As a result, doing research is crucial.
Your risk profile should consider many factors, including your overall financial position, other assets you hold, and your general attitude to risk. If you have any questions about what level of risk is appropriate for you, please contact us.
3. How does it fit into your investment portfolio?
You shouldn’t view investments in isolation, but how they align with your other investments and financial plan. This can help you build a diversified portfolio. We can help you create a portfolio that suits your goals, including balancing the risk profile of different investments.
Contact us to talk about your investments
If you have any questions about green bonds or other investment opportunities, please get in touch. We can help you balance your financial goals with ESG issues you may want to consider.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
