We are excited about opportunities ahead for ESG-oriented investors, particularly in the “use of proceeds” bond market. These bonds have a stated commitment to invest proceeds into green, social, and sustainable projects and have seen positive momentum in issuance from both sovereign and corporate issuers in the last five years. We believe we are just getting started. 

For many investors with an ESG focus, the need for a global focus on carbon emission reduction between now and 2050 cannot be overstated, and the international community is responding. In Europe, climate-focused regulation in the financial services industry continues to develop at a blistering pace and in the US, the Inflation Reduction Act has created tax incentives for issuers to accelerate carbon reduction goals. For the broader asset management community, the Net Zero Asset Managers Initiative (NZAMI, to which J.P. Morgan Asset Management is a signatory) commits asset managers to work with fixed income issuers on their path to decarbonisation. 

Beyond green financing, social factors have increasingly come into sharp focus, providing an additional tailwind for use of proceeds issuance. Whether through a renewed focus on healthcare via Covid vaccination outreach and future vaccine R&D, or soaring inflation highlighting economic inequality, issuers are taking their social responsibilities seriously. 

The use of proceeds market is now almost $3 trillion in size globally, with another $1 trillion expected to be issued in 2023¹. With increased size comes increased focus, and a range of standards have been associated with commitment language, structures, and disclosure requirements in order to minimise the risk of greenwashing. Investors want to see transparent language with focused projects. When we are evaluating a particular bond, we like to see direct commitment of spending proceeds towards green or social projects which are core to the business model, alignment with recognised sustainable activities, and transparency of where the proceeds are being spent within a year of issuance. Over time, we expect those use of proceed bonds that are genuinely helping to finance the transition to a sustainable economy to outperform those which are less clear about their intentions. We believe this evolution will prove the importance of active management when evaluating these types of bonds.

In addition to the exciting opportunities unique to the use of proceeds bond market, we are optimistic  about the value proposition of fixed income overall. The Bloomberg Barclays Global Aggregate Index (hedged to EUR) yields 3.84%, at the end of February 2023. One year ago, it yielded 1.76%². Given the rapid central bank tightening of the past year, fixed income experienced some of the worst drawdown in returns we have ever seen. As painful as this has been, it has created a historic opportunity, especially as inflation begins to moderate and the potential for a downturn in growth starts to materialise. This precipitates a period where high quality fixed income becomes a good place to allocate capital. Corporate balance sheets still look great to us in the US and in Europe – and the higher quality nature of use of proceeds bonds should offer an additional layer of defensiveness in an otherwise volatile market.

That’s why we believe there’s never been a better time to consider our fixed income strategy with a sustainable investment objective (Article 9), the Green Social Sustainable Bond Fund. Live since November 2022, – and more recently as an ETF – the strategy offers high quality, core fixed income exposure, while being focused solely on bonds where the use of proceeds can be tied to sustainable projects. We apply a robust framework for assessing the sustainability of such issuances to ensure that every single bond in the portfolio can be defined as a sustainable investment under EU SFDR. 

We hope this letter gives you a broad oversight of the use of proceeds bond market. We will be back each quarter to bring you our thoughts on the dynamics of the green bond market, examining issuance trends, performance themes, and individual cases which we think are worth exploring in more detail. In the meantime, you can learn more about J.P. Morgan Asset Management’s approach to the use of proceeds bond market and our Green Social Sustainable Bond strategy on our website.

¹ Source: HSBC Research, J.P. Morgan Asset Management. As at January 2023.
² Source: Bloomberg. As at 28 February 2023.