Building a framework
We recognise that labelled bonds are a useful part of the public debt market toolkit in the pursuit of generating impact. We have developed a labelled-bond framework that aims to ensure we stay true to our commitment to high-integrity fixed income impact investing and combatting greenwashing. Below, we outline our best practices.
UoP bonds
1. Threshold for use of proceeds
Without standardisation in the labelled-bond market, the percentage of proceeds allocated to social or environmental projects varies. To maximise the materiality of our investments, we favour bonds where over 90% of the proceeds are to be allocated to eligible projects.
2. Lookback period
Some UoP bonds are issued to refinance an existing or historical project. While we accept some exposure to refinancing for long-term projects, we typically have a maximum lookback period of two years. This ensures our financing is tilted towards new projects.
3. Sustainability of operations
Some sectors are excluded from our investable universe, as we believe they are fundamentally misaligned with our impact objectives; we will not invest in UoP issuance from issuers in these sectors. Where an issuer’s business model does not qualify for impact, but we approve at the security level, we consider the sustainability of their operations/business practices in our investment process.
4. Valuation
Once we have determined whether a bond is eligible for our investment universe, fundamental analysis ensures that the bond is suitable according to the risk and return targets of our portfolios.
Sustainability-linked bonds
SLBs’ more flexible structure, combined with a lack of regulation, creates opportunities for greenwashing. We pay close attention to SLBs’ structure to ensure that the issuance aligns with our high-integrity approach:
1. Sustainability performance targets
We favour issuers with ambitious SPTs and meaningful financial penalties for missing future goals — for example, via a coupon step-up. We avoid issuers that set targets that are in line with what the issuers were planning to achieve through their ordinary business activities or have minimal penalties, such as a step-up that is small or implemented late in the coupon payment cycle.
2. Consistent KPIs
We favour issuers that use consistent KPIs to monitor progress towards an SPT. We feel issuers should report historical KPI levels, use consistent base rates and be held accountable through engagement and potentially divestment if their KPI reference changes.
3. Sustainability of operations
As with UoP bonds, we will not invest in SLBs from issuers in sectors that are misaligned with our impact objectives.
4. Valuation
As with UoP bonds, it’s critical to assess financial characteristics to determine suitability according to portfolio risk and return targets.