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By Andrew Auslander, CFA, FRM

I had a chance to catch up with Henry Shilling, a board member of FIASI (Fixed Income Analysts Society, Inc.) and Caroline Flammer, Associate Professor and Dean’s Research Scholar at Boston University’s Questrom School of Business. Professor Flammer’s work examines how companies’ social and environmental engagement, and their corporate social responsibility (CSR), contribute to their competitiveness. Henry, who founded Sustainable Research and Analysis LLC, is the organizer and a moderator of a panel of a very special event, ESG in Fixed Income: Shining a Light on Transparency, that will take place on Thursday, April 22nd from 2-4:30pm ET and Friday, April 23rd from 10:00am-3:30pm ET. Professor Flammer will be moderating a panel with experts from BNP Paribas, Nuveen and BlackRock at this event.

There are questions around the very definition of ESG. The lack of consensus around ESG has brought to light the risks and implications of greenwashing, and FIASI aims to address this and several related topics in this two-day virtual summit. Read on to get a sample of some of Henry and Caroline’s insight into ESG and green bonds.

What is the rationale for the focus of FIASI's event on ESG Integration?

Henry: It’s best to first define what is meant by ESG integration. ESG integration is the systematic and consistent accounting for environmental, social and governance risk and opportunities, where these are considered to be relevant and material factors in the investment decision process. Whether a decision is made to purchase a security, sell or hold it, ESG accounting for ESG factors will serve to inform the decision from a risk and reward points of view. 

ESG Integration is just one strategy of sustainable investing. Can you please elaborate on the other strategies?

Henry: You are right. Sustainable investing is an overarching term that encapsulates at least five different strategies. The first is the values-based approach, investing based on your beliefs. The main goal is to achieve a positive societal outcome. Typically this is executed via negative screening of companies or industries that the values-based investor believes has negative societal outcomes. A related strategy is excluding companies or industries such as tobacco, alcohol, firearms. A third sustainable investing strategy is impact investing. Impact investing is based on two factors. The first factor is additionality. This means you would not have invested in the project or security if it did not have sustainable aspect to it. The second factor is the investment can achieve measurable social and/or environmental impacts while financial returns may vary. By the way, this is not necessarily the case with green bonds even if they are certified as these more are more likely to fall into the thematic investing category.

The fourth sustainable investing strategy is the thematic approach. This is where the focus is on a particular idea or unifying concept. Examples are clean energy, gender diversity, low carbon emitting stocks, green bonds, and social bonds. The fifth sustainable investing strategy is ESG integration, which I already spoke about. These strategies and their definitions are still evolving and, in the meantime, the lack of consensus about this contributes to confusion and misunderstanding. 

What are the drivers and barriers of ESG integration? 

Henry: A major driver is risk management followed by increased demand from clients, largely institutional investors such as public pension funds, endowments and foundation, to mention just a few.   There is some retail demand, but to a much lesser degree, in my estimation.  This is likely to change over time. 

Fiduciary responsibility and regulations are also important contributors to demand, with regulations gaining momentum, especially in Europe and now, with a change in Administration in the US, that is also likely to take flight here.  Already, the SEC and the Department of Labor have announced plans to focus on corporate ESG reporting as well as the consideration of sustainable investment options in 401(k) plans and other defined contribution programs. 

On the other hand, lack of comparable and historical data and limited understanding of ESG issues and ESG integration are leading barriers to ESG integration in fixed income, combined with the complex nature of fixed income securities.  This is an area that we at FIASI are attempting to address in our ESG in Fixed Income events, including the upcoming Earth Day linked program.   

Caroline, can you please comment on the opportunities you observe that make you hopeful green bonds can play a critical role in ensuring a more sustainable future - a future that ensures a transition to a low-carbon economy?

Caroline: Green bonds are securities whose proceeds are committed to the financing of green projects. In recent years, the green bond market has experienced a downright green bonds boom. Some of the challenges, however, are the lack of public governance, the definition of “green,” and how to ensure that companies do indeed invest in projects that are beneficial for the environment. For this reason, concerns have been raised that—at least to some extent—green bonds may represent a tool of greenwashing.

My research shows that, on average, companies do improve their environmental footprint following the issuance of green bonds. However, this is only observed among green bonds that are certified by independent third parties. For non-certified green bonds, I do not observe significant changes in environmental performance, which could be symptomatic of greenwashing.

Also, and importantly, I find that the stock market responds positively to the issuance of (certified) green bonds. This suggests that green bonds can be a powerful tool that benefits both companies and the planet.

In your view, what are the critical challenges that need to be addressed in order to ensure a transition to a low-carbon economy?


There is no silver bullet. We need to take multiple actions. For example, we will need to further expand the green bond market, as the current size of this market is in no comparison to the large amounts of financing that are needed to achieve a transition to a low-carbon economy. Second, it will be important to have processes in place that guarantee that “green” funding is channeled toward projects that are indeed effective in achieving the transition.  Third, we will need to secure additional sources of financing, as the green bond market alone is unlikely to be sufficient.

To learn more about ESG in Fixed Income: Shining a Light on Transparency or to sign up, please go to www.fiasi.org/. The event will be held on Thursday, April 22nd from 2-4:30pm ET and Friday, April 23rd from 10:00am-3:30pm ET. If you sign up by April 7, 2021, you will save 50% on the attendance fee.

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