ESG bonds an additional arrow in advisor quiver, says Nuveen strategist

There’s been a lot of time and talk about ESG stocks. So let’s take a moment and focus on something else, shall we?

Let’s chat about environmental, social, and governance bonds for a little while.

ESG stocks may get the all the attention – both positive and negative – but the ESG fixed income universe is nothing to sneeze at. ESG debt topped $6.5 trillion in the first half of 2024, up from $5.4 trillion a year ago, according to the Institute for International Finance. ESG debt issuance was over $700 billion in the first 6 months of 2024, comparable with the first half of the previous year.

Steve Liberatore, lead portfolio manager for Nuveen’s fixed income strategies that incorporate ESG criteria and impact investments, says one of the most important things financial advisors need to remember when speaking with clients about ESG bonds is that, despite all the headlines, they are still bonds at their core and a vital part of any portfolio.

“Depending upon how you want to approach it in your risk tolerance, they can go anywhere from serving as a core allocation to something that could be considered a little bit more satellite within the portfolio that's focused on driving significant yield and spread enhancement. Again, it's just dependent upon what the investor is looking for,” said Liberatore.

Liberatore served on the ICMA Green Bond Principles Advisory Council and was a member of the initial executive committee. He is a member of the UN Capital Development Fund’s working group on climate resilient infrastructure finance and serves on the UN’s Joint SDG Fund’s Blue Economy Investor Advisory Group. He also serves on the steering committee of the Orange Bond Principals and Sustainalytics’ Investor Committee. Nuveen manages approximately $20 billion in public fixed income ESG and impact strategies and investments.

In terms of examples, Liberatore points to a recent deals he completed for the World Bank's Amazon reforestation security. That particular transaction funded the purchase of land that had been deforested in the Amazon and was scheduled to be replanted with the appropriate native species to generate carbon removal credits off-sold to Microsoft.

“I think the important thing, and maybe what gets confused or lost sometimes, is that the point of what we're doing, and if you're doing it correctly, is you're focusing on securities that have more stable free cash flow going forward,” said Liberatore. “So as a bond holder, obviously we're an asymmetric payoff asset class. The ability to identify securities that are going to have a more stable free cash flow profile in the future indicates that you have a higher likelihood of being repaid, which is how you generate outperformance.”

So in other words, according to Liberatore, just like for ESG stocks, ESG bondholders can also “do well by doing good” as the saying goes.

“When you're looking at these types of securities, what you want to ensure is that you're identifying issuers who have a longer term thought profile and a longer term view. That they are investing today to ensure that they are more viable in the future,” said Liberatore.