The top-performing sustainable intermediate-term bond funds have investment-grade portfolios, according to Hale. Green or other social impact bonds in these portfolios can be taxable municipal bonds, governments or corporates.
Hale thinks most of the interest in sustainable investing is in the general area of the sector and not necessarily focused on the environment. “However, for many investors, so-called ‘green bonds’ are compelling because they finance projects that help fight climate change and hasten the development of a greener, low-carbon economy,” he said.
Research from Barclays shows that issuers with high environmental, social and governance (ESG) ratings tend to outperform low ESG performers in the corporate high-yield and corporate investment-grade bond sectors, noted Liberatore of Nuveen.
Issuers with the best environmental, social and governance practices don’t risk their ability to generate free cash flow, he said, and tend to be the best operated and managed issuers within their sectors.
Liberatore is seeing a preponderance of opportunity in two environmental themes: natural resources, and renewable energy and climate change. He expects this to remain the case for a while because the metrics and goals in these areas are a little more straightforward, understood and accepted than other sectors.
For example, renewable energy projects can measure kilowatt hours of energy produced, and calculators can tell how much carbon dioxide is mitigated, and this can be translated to something the average person can understand and visually comprehend, such as the number of cars taken off the road, he said.
Natural resources and renewable energy and climate change accounted for 76 percent of the impact investments within the TIAA-CREF Social Choice Bond Fund as of 3/31/19, according to Liberatore.
Liberatore and O’Brien stressed that it’s beneficial for advisors to have more holistic conversations with clients, including their investment interests.
“Multiple advisors have told me that they don’t feel like they ever lose a client to performance,” said Liberatore. “They lose a client because the clients feels like the advisor no longer really understands what they need.”