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How fixed income could help our carbon transition

In terms of key opportunities, we believe the role fixed-income markets have in funding the transition away from carbon-intensive economies will become increasingly critical.

Most of this funding is expected to be financed by debt from governments, international development agencies and companies, rather than via equity. We expect it increasingly to come through ‘labelled’ bonds (bonds with specific environmental, social and governance (ESG) or sustainability objectives), such as green, social, sustainable and sustainability-linked bonds as well as through ‘vanilla’ bonds. Private capital will be key as government balance sheets will struggle to sustain the necessary level of investment required, which will be needed for all sectors and countries – not just the most carbon-intensive ones.

There are already some big central-bank stimulus programmes in place, but we believe these are just a start. Sustainable finance has been growing quickly, but it is still small, and much more will be required for the world to achieve net zero. Take the labelled-bond market, for example; although it has reached US$1.5 trillion1 in outstanding issuance, this only represents about 1.2% of the global bond market.

That said, over the next few years, we think there will be less need for bond issuance to be in labelled-bond form. The increasing accountability of all stakeholders, including governments, companies, investors and asset owners, should mean less need for labels but more emphasis on differences in the cost of capital between issuers.

Scott Freedman, portfolio manager, fixed-income team, Newton Investment Management.


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