Investor demand for fixed-income  ESG finance has grown and bred new financial products, a trend S&P Global Ratings expects to continue as values-based millennials inherit a massive wealth transfer estimated at $30 trillion, S&P Global Ratings said in a report, The Rise Of ESG In Fixed Income.

“Environmental, social, and governance, long considered a niche consideration in equity investing, has made major inroads on the mainstream fixed-income market,” said S&P Global Ratings credit analyst Corinne Bendersky. Climate change and resource scarcity, workplace productivity and product safety, along with technological advances and changing consumer preferences, are among the ESG-related risk factors that have real credit implications.

It wasn’t until the launch of the UN Principles for Responsible Investment in 2006 that the concept of ESG started to spread into the mainstream. While the equity market has historically been on the front lines of ESG investing, the bond market is quickly catching up.

Assets managed according to ESG strategies reached nearly $23 trillion by 2016, up 25% from 2014, accounting for around one-quarter of professionally managed assets globally, according to the Global Sustainable Investment Alliance’s latest review of the state of sustainable investment.

And in the fixed-income sphere, at S&P Global Ratings we’ve observed an increase in investor interest in ESG fixed-income investment strategies and consequently greater attention to how entities are navigating environmental and social challenges.

“Institutional investors such as pension funds and insurers are particularly interested in ESG because it captures long-term and existential risks,” Ms. Bendersky said.

The rise in investor demand has led to an acceleration in new fixed-income markets dedicated to ESG themes. For example, the green bond market, whose proceeds are earmarked for projects with specific environmental objectives, has grown rapidly over the past five years, achieving a compound annual growth rate of 85%. We expect the market to continue to accelerate, reaching $200
billion in new issuance in 2018.

“We expect ESG demand to continue on a growth trajectory as millennials, who by 2025 will collectively comprise 75% of the workforce, place greater emphasis on integrating these values into their investment choices,” Ms. Bendersky said.

Indeed, millennials, who are considered a values-driven generation, are poised to receive a wealth transfer estimated at nearly $30 trillion from baby boomers.

We also anticipate that asset managers will use ESG factors to help make investment decisions, thereby making ESG management part of their fiduciary duty.

This report does not constitute a rating action.

Source: S&P