They can serve as an essential ballast while helping you achieve your social and environmental goals.
If you’re like most people, you’ve been thinking about (and probably even investing in) bonds lately. Rising interest rates have made the asset class more attractive than it has been in over a decade, and fixed income can help hedge against market and economic uncertainty.
Clearly, fixed income has the potential to help you achieve your financial goals. But it can also help you achieve your environmental and social goals at the same time.
If you’re concerned about California wildfires, for example, you can consider investing in municipal bonds that finance firehouses or mortgages for firefighters. If you care about education, your fixed income investments can help finance the construction and upkeep of schools. And if you care about the oceans, your bond portfolio can help finance marine conservation—while still potentially offering you market-rate returns.
In fact, sustainable fixed income tends to have a bottom-line rationale: Bond issuers with environmental, social and governance (ESG) ratings are often more competitive, with lower volatility and better returns.1 The long-term nature of fixed income (with many bonds having a timeline of 30 years) can make the asset class a great fit for long-term-oriented, sustainable investors.
With more than US $635.7 billion in sustainability bonds issued in 2022 alone, this new type of ballast for your portfolio could be well worth exploring.2
What are “green” bonds?
If you’re curious about sustainable bonds, one of the easiest places to start is with “green” bonds, which are bonds that explicitly finance environmentally friendly projects (such as installing solar panels, planting sustainable agriculture and retrofitting buildings). The first bond that was labeled “green” was issued in 2007 by the European Investment Bank to fund climate-related projects.3 Since then, green bonds have been issued by countries and companies all over the world.
More recently, green bonds have been followed by “blue” bonds that finance water-related projects (such as sustainable fisheries) and “social bonds” financing things such as healthcare clinics and job training programs. Unless otherwise indicated, these bonds can all possibly offer competitive, market-rate returns.
What about the rest of the bond market?
Some investment managers focus on bonds that are explicitly labeled as “green,” “blue” or “social.” But other investment managers go one step further, looking at the broader bond market to determine the sustainability footprint of all bonds, regardless of label. These managers examine each bond’s “Use of Proceeds” (which are listed in the bond’s issuing documents) to determine what the bond’s impact might be, and whether that activity should be considered “sustainable.”
With that lens, a much broader market of sustainable bonds become available to you, including:
- Mortgage-backed bonds: You can invest in responsibly issued and structured mortgages. Some of these bonds finance homes for teachers and first responders who might otherwise not be able to afford to live where they work. Other versions of these bonds finance home ownership for veterans or first-time homebuyers in underserved communities. In places such as Detroit, some people choose to buy bonds that specifically support homeownership in their own neighborhoods.
- Municipal (muni) bonds: U.S. municipal bonds predate “impact” or sustainable investing; for decades, they’ve been the main way in which community infrastructure (including education, healthcare and utilities) gets funded. Lately, there have been innovative efforts to use the municipal bond market to combat historical patterns of segregation and system racism across the United States. 4, 5, 6 If you invest in munis in your own state, you can possibly benefit from a tax advantage, so these are particularly popular among high-net-worth clients.
- Corporate bonds: Companies that issue stocks often issue bonds as well. So the same environmental and social considerations you would have when deciding whether to buy a stock can apply when you think about whether to buy that company’s bond. These considerations often include factors such as the company’s carbon footprint, treatment of its workforce and supply chain management practices.
- Sovereign debt: Countries have ESG ratings just as companies do, so investors can consider a nation’s sustainability track record when deciding whether to purchase its bonds. If you like a country’s net-zero commitments (e.g., several Nordic nations are leaders in decarbonizing their economies), you can buy its national bonds and help capitalize its activities, such as building green transportation infrastructure or wind farms.7
Some of most sophisticated sustainable bond managers also look at the sustainability characteristics of the issuer, underwriters and syndicate that helped bring the bond to market. At every step of the process, these managers interrogate who is issuing and distributing the bond as well as their sustainability track record. Some people even work directly with issuers to help bring bonds to market that might not otherwise exist.8
Stability during volatility
What makes the bond market attractive is that you know your interest rate, even in times of uncertainty. Though prices may go up and down, there’s typically more assurance in the bond market than there is in the stock market.9
Just like traditional fixed income strategies, sustainable fixed income strategies are typically benchmarked against conventional indices. 10 Sustainable fixed income strategies with better ESG scores (also referred to as ESG Leaders*) have the potential for lowered risk in times of uncertainty while delivering comparable returns to traditional bonds.
We can help
To learn more about how sustainable fixed income—good ballast for many portfolios—might help support your financial goals and your values, speak with your J.P. Morgan team.
* The MSCI ESG Leaders Indexes are designed to represent the performance of companies that have high Environmental, Social and Governance (“ESG”) ratings relative to their sector peers.
1 According to MSCI Inc, the global provider of ESG Indexes,“Higher-ESG-rated corporate bonds had lower systemic risk, lower spreads and therefore higher valuations while controlling for common corporate-bond factors,” Special Issue on Climate: Part 2, The Journal of Impact & Esg, Portfolio Management Research, Winter 2021. Mendriatta et al,“How ESG Affected Corporate Credit Risk and Performance,” MSCI, 2021"
2 “How green, social and sustainability bonds could change the world,” J.P. Morgan Asset Management, Financial Times, March 2023.
3 "15 years of EIB green bonds: leading sustainable investment from niche to mainstream,” European Investment Bank, July 2022.
4 David Wood, “Racial Equity as a Topic for Responsible Investment: why and how investors should change,” Harvard Kennedy School Center for Public Leadership, 2022.
5 Another such center, Activest, is also working to advance racial and economic justice by making bond-financed capital available to fiscally sound but under-resourced Black communities in pursuit of “fiscal justice.”
6 Public Finance Initiative Framework, “Bond Markets & Racial Equity: Project,” March, 2022.
7 Iceland’s Sovereign Sustainable Financing Framework, Government of Iceland Ministry of Finance and Economic Affairs, 2023.
8 Lincoln Institute of Land Policy, 2021.
9 J.P. Morgan 2023 Long-Term Capital Market Assumptions, November 2022.
10 Bloomberg Finance LP, 2023 J.P. Morgan Private Bank via Bloomberg Finance LP, June 2023.