Sponsored by Nuveen, this article delves into the evolving landscape of impact credit. In December 2024 at 12.09 pm, readers have the opportunity to subscribe and gift articles. The impact bond market is maturing, offering diverse options across sectors and geographies.
Unlock the Potential of Impact Credit with Nuveen
Expanding Opportunity Set
The opportunity set for impact credit is continuously expanding, providing a broader range of diversification choices for those aiming to align their portfolios with social and environmental goals. According to Environmental Finance, the issuance of green, social, and sustainable (GSS) bonds in 2024 is likely to reach $1 trillion, bringing the total market value to over $4 trillion. Although GSS labels aren't how Nuveen defines impact, they serve as a good proxy for market growth. Impact bonds are now found in various sectors such as corporates, sovereigns, supranationals, asset-backed securities, and more. This growth allows investors to diversify not only across sectors but also geographically. Europe dominates the labelled GSS market with approximately 50%, while issuance in Asia is on the rise, and emerging market sovereigns and corporates are also issuing GSS bonds.Investors can position impact-focused portfolios based on the credit cycle using traditional active fixed income investing techniques. This includes sector allocation, security selection, duration and yield curve positioning, issuer location, and currency.Impact and Investment Returns
For investors, achieving both impact and financial return objectives is a challenge. At Nuveen, an impact bond must have a direct and measurable social or environmental outcome. Direct means the bond's proceeds fund specific projects with a clearly defined benefit. Measurable refers to key performance indicators that issuers must disclose. Over 16 years, Nuveen has managed more than $21 billion in impact bond assets on behalf of clients. Their framework allows assessment on both impact and financial bases. They aim to generate excess returns and won't invest if a bond doesn't have an attractive total return profile. By working with issuers and underwriters and collaborating with partners and clients, they have refined their framework and ensured clear understanding of criteria. The more "direct and measurable" standards in deal structures, the greater the opportunity set. It also leads to better liquidity, disclosure, and issuance processes.Innovative Transactions
Nuveen has been a lead investor in unique, innovative transactions. For example, the Vietnam emissions reduction bond provided clean water to rural school students. The Ecuador debt-for-nature swap funded marine conservation. The wildlife conservation bond protected and bred endangered black rhinos. A reforestation bond acquired previously deforested parts of the Amazon, the first public fixed income market transaction to remove carbon. As leaders in the impact investment space, they are often involved in deals before they become widely known. They can express their and clients' views to ensure transactions meet their direct and measurable framework. They have turned down transactions that don't meet requirements and seen subsequent deals with better structures. There are many compelling financing innovations in the impact bond market, including blended finance transactions with credit support. They also collaborate with experts to understand environmental, economic, and social impacts. As they look at new projects, they continue to learn and build skills to support innovation and move issuance to higher levels. With increasing volume and diversification, the debt market can fund sustainable commitments.Jessica Zarzycki, CFA®, is the portfolio manager for Nuveen. She and colleague Stephen Liberatore discuss the latest trends in the impact bond market at Nuveen.com.Investing involves risk, including the loss of principal. There is no assurance of positive performance. Past performance doesn't guarantee future results. Nuveen, LLC provides investment solutions through its specialists.Subscribe to gift this article and subscribe now. Already a subscriber?Latest In Financial services and fetching latest articles. Most Viewed In Companies.READ MORE