Proceeds, projects, progress: The case for green, social and sustainability bonds in UK Defined Contribution (DC) plans

With active management, we believe there is an opportunity here to generate alpha and align members’ portfolios with clear environmentally and socially beneficial projects.

In brief

  • The green, social and sustainability (GSS) bond market has been growing rapidly, and such bonds offer Defined Contribution (DC) investors transparency and alignment with environmental, social, and corporate governance (ESG) goals
  • Fixed income has undergone a remarkable repricing, and the period of extraordinarily low interest rates appears to be over. Therefore, fixed income could once again offer income and diversification potential
  • The aggregate GSS market out-yields the broader global aggregate market – which means the “greenium” associated with use-ofproceeds bonds need not be a significant concern.
  • Active management is crucial within this market; labelled bonds carry a heightened risk of greenwashing, and investors should consider each bond’s sustainable issuance framework as well as the issuer’s creditworthiness.

J.P. Morgan Asset Management’s 2023 Long-Term Capital Market Assumptions (LTCMA) highlighted the potential for introducing fixed income back into portfolios following the broad-based repricing of the bond market over the past two years. As central banks approach peak rates, bonds are back on the agenda for DC schemes and their members looking for liquidity and diversification throughout the glidepath.

At the same time, DC investors – no strangers to considering the ESG exposure of their portfolios – are looking to investment managers to help them reach their climate goals. They are looking for innovative ways to measure the output and the impact of their investments, while accessing compelling investment opportunities. Here, we explain why the growing green, social and sustainability (GSS) bond market represents a significant untapped opportunity for DC schemes and their members: this liquid, diversified and income-generating asset class can offer heightened transparency and full alignment with sustainable goals.