When people think about doing good with their money, they often picture investing in sustainable companies through the stock market. But there’s another powerful, fast-growing way to support positive change: ESG-labelled bonds.
These are bonds – a type of investment where you lend money to a company or government – that are specifically designed to fund projects with environmental or social benefits, such as clean energy, green infrastructure or affordable housing. Like other bonds, they aim to give you a financial return too.
Last year alone, more than $1 trillion (£780 billion) worth of ESG-labelled bonds were issued globally. It’s a clear sign that sustainability is becoming a major force in financial markets.
But some of these bonds deliver more impact than others, and it’s important to know what to look for before you invest.
What are ESG-labelled bonds?
ESG stands for Environmental, Social and Governance – the three pillars of responsible business practices. ESG-labelled bonds are issued to fund projects that tackle issues in these areas.
There are a few different types:
- Green bonds – used for environmental projects, like wind farms or energy-efficient buildings
- Social bonds – support social causes like healthcare, education, or housing
- Sustainability bonds – fund a mix of green and social projects
- Sustainability-linked bonds – where companies commit to broader ESG goals like cutting carbon emissions, and can face financial penalties if they fall short
Today, around 16 per cent of bonds issued by European companies and 11 per cent by UK (sterling) companies are ESG-labelled. Green bonds still lead the way, but other types are catching up fast.
Bonds vs shares: what’s the difference?
Investing in shares means owning part of a company and sharing in its profits. Bonds, on the other hand, are more like loans. When you buy a bond, you’re lending money to a company or government and in return, they agree to pay you interest and repay the full amount later.
Bonds are generally considered lower-risk than shares, offering more stability but potentially lower returns. Because of this, bond investors place great emphasis on avoiding nasty surprises such as defaults or sudden downturns.
That’s why at Liontrust we typically invest in larger, more established companies that have already proven they can weather economic ups and downs.
Are ESG bonds always a good thing?
The rise of ESG-labelled bonds is encouraging. It means more capital is being directed to projects that fight climate change, improve public services and support fairer societies. For anyone wanting their money to reflect their values, these bonds can feel like a straightforward choice.
But – and it’s a big but – not all ESG-labelled bonds are created equal.
When you buy one of these bonds, you’re not just funding a specific project, you’re investing in the company or organisation as a whole. So even if the project itself is green, the wider business might not be.
For example, some oil and gas companies have issued green bonds. But if their core business still revolves around fossil fuels, the environmental benefit of your investment may be far less than it seems.
This is why it’s crucial to look beyond the label.
How we assess ESG bonds
At Liontrust, our Sustainable Investment team has been analysing sustainable investments for more than 20 years. Before we invest in any bond, we ask:
- Does the company’s main activity contribute positively to society or the environment?
- Are they managing ESG risks (like carbon emissions or worker rights) effectively?
- Is the company financially healthy enough to pay back its debt?
We combine this ESG research with traditional financial analysis to ensure we’re investing not just ethically, but wisely too.
A thematic approach to bond investing
While equity investing often involves backing smaller companies with long-term growth potential, bond investing is about stability and resilience. Our focus is on larger companies with strong credit profiles and reliable cash flows.
We also use a thematic approach, targeting companies aligned with one of our 22 sustainable investment themes, from clean energy to healthcare innovation. That might mean our bond portfolios look a bit different to our equity ones – with fewer high-growth tech names, and more in sectors like utilities, telecoms and financials – but the goal remains the same: investing in companies helping to shape a better future.
Risk warning: All investments carry risk. The value of your investment may go down as well as up, and you may not get back the amount you originally invested. Past performance is not a reliable indicator of future results. Consider seeking independent financial advice before making any investment decisions.
