As we continue to face unprecedented shocks to our global health care system and economy, many are reflecting on the role that responsible investment can play in steadying a system being rocked by popular outrage and discord.

The coronavirus pandemic will have far-reaching social and economic consequences for us all, with issues such as climate change and extreme weather adding to concerns for investors. Consensus is converging toward an agreement that environmental, social and governance (ESG) risks can materially affect financial performance. In our view, they are important drivers of investment value. As a result, we have integrated ESG considerations into our central risk analysis decision-making processes for all credit investments, for more than a decade.

Impact bonds, which typically include designated use of proceeds through which issuers can gradually shift toward more sustainable practices, are one way that investors can help support the transition to a more sustainable future. These instruments can no longer be seen as a niche, seed-stage asset class. Rather, they are a viable addition to portfolios in their own right. Impact bond issuance surged to $300 billion in 2019 alone, and outstanding impact bonds recently passed the $1 trillion mark in 2020. The global COVID-19 pandemic, and its resulting health crisis, will likely add momentum to this growth.


We are witnessing the emergence of a new and compelling investment universe. But until more formal frameworks are enforced, investors interested in adding impact bonds to their portfolios should be aware of the rise in ‘impact washing,’ where the impact of the proceeds of an impact bond are overstated. While the impact bond market is ripe with opportunities, large parts remain obscured by low levels of disclosure. Inconsistent reporting renders it difficult for investors to identify whether bond proceeds are used as initially marketed or are simply impactful in name only. In fact, out of the 200 impact bonds we have rated since 2017, just 31 percent have met all our requirements to be classified as a genuine impact bond. Furthermore, 19 percent received a red score, meaning they did not pass the criteria, with the remaining 50 percent rated amber, indicating weaknesses in their adherence to impact classification measures.

So, what can investors do to protect their interests?

Be Wary of Unexpected Harm

Impact washing can be addressed through robust risk analysis. Careful attention must be paid to how these bonds are marketed and communicated. Investors need to ask how much of an impact these bonds can realistically be expected to have. An initial question would be whether the issuer’s sustainability strategy is in line with its bond’s use of proceeds. There is a risk that issuers use these instruments to crudely bolt-on impact aspirations. To be credible, an impact bond must be one element of an organization’s broader shift in a sustainable direction, with transparent stage-posts that can be reported on as impact is achieved.

As a responsible investor, you don’t want a bond that can only offer financial performance. Our approach is to continuously check whether all bonds pass a minimum sustainability standard, covering ESG themes and using an internally generated proprietary score. If they don’t pass our standard, they won’t be investable, irrespective of any green bond label, for clients’ sustainability-oriented portfolios. We have also been trying to improve the quality of bonds available by collaborating with issuers and investors ahead of new impact bond issuance to support greater market standardization. Over time, we believe this engagement on the design of the instruments coming to market can make a truly meaningful difference to the resulting ‘impact’ they are ultimately likely to have.


Direct engagement with companies should always be a critical part of ESG risk analysis. The asset managers you work with must also be prepared to report on their engagements as a part of their role as an investment steward. We are encouraged by U.S. issuers’ focus on sustainability and impact bond issuance and have identified a new willingness to discuss this with investors.

It is vital that would-be investors in the impact bond universe adopt a robust due diligence process that has analysis and monitoring of ESG factors at the center of its approach. We have responded to this challenge by developing a broad scoring process which we can apply to impact bonds as well as all other potential investments. It focuses on research-led decisions to identify, influence and invest in businesses which offer sustainable business models and reliable cashflows. Insight also recently developed a proprietary ESG rating tool which aggregates and assesses external data against a set of 29 ESG risks, creating a bank of information for our credit analysts to review.

Josh Kendall is a senior ESG analyst at Insight Investment.

This document is a not a financial promotion and is not investment advice. Unless otherwise attributed the views and opinions expressed are those of Insight Investment at the time of publication and are subject to change. This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make such offer or solicitation.

Past performance is not indicative of future results. Investment in any strategy involves a risk of loss which may partly be due to exchange rate fluctuations.