Positive screening and the role of green bonds – what investors need to know

It’s often thought that shareholders hold all the keys when it comes to influencing environmental, social and governance (ESG) practices, but bond investors play an important role too.

The bond market is bigger than the shares market and bond issuers frequently come to the market to issue bonds, offering opportunities for engagement. Some bonds also have specific green objectives, meaning more money can be used to invest for a positive impact.

This isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. Remember, all investments and any income they produce can fall as well as rise in value, so you could get back less than you invest.

What is positive screening and why does it matter?

Positive screening is the process of investing in company shares or bonds, that score highly on ESG factors compared to their peers. The criteria is important though – not all ESG factors will be as important as each other, or relevant in different industries.

Depending on which ESG criteria is used (and so what factors are considered), means you can help make sure you’re investing in companies on the right side of change.

Fund managers using positive screening can build portfolios of investments that are ‘best in class’, filled with the forward-looking leaders of tomorrow. These businesses are likely to be the ones ahead of evolving regulations and standards, and leading change.

Investors using this approach can also help to accelerate change across industries. It can help encourage companies, not currently screening as best in class, to improve.

Positive screening is different to negative screening which uses certain ESG criteria to exclude low scoring companies or laggards. This might be for example, excluding companies generating a certain percentage of their revenue from selling tobacco. These minimum standards allow investors to feel comfortable they’re not funding practices that don’t align with their morals.

By nature, screening leaves fund managers with a smaller selection of bonds to choose from. This could impact performance when excluded areas outperform the market. But it works the other way too by boosting performance when those same areas underperform.

Whether fund managers use a type of screening approach or just integrate ESG analysis into their investment process, we think they should be assessing ESG factors. Whether investing in shares or bonds, it’s good risk management.

The role of green bonds to encourage change

Green bonds are a type of fixed-income investment created to raise money for climate and environmental projects. They typically focus on clean energy, low-carbon building, and low-carbon transport, and can be issued by companies and governments.

We’ve already seen lots of countries issue green bonds.

In 2020, Chile issued a sovereign green bond funding the development of low-carbon transport. In 2021, the UK government launched their first green gilt to raise money for offshore wind and schemes to decarbonise homes and buildings. And this year, the Netherlands announced plans to issue a new green Dutch State Loan to finance climate change mitigation and adaption projects.

Corporate green bonds are more common in industries where the natural environment is financially material, for example in energy, utility, or transportation sectors. Although, they can be issued by any company looking to finance projects that will have a positive environmental impact.

Last year, Amazon announced an issue of a $1bn sustainable bond. The proceeds will be used to fund projects in five areas – renewable energy, clean transportation, sustainable buildings, affordable housing, and socioeconomic advancement and empowerment.

The rapid growth in green bonds has seen the emergence of other sustainable issuances, like social bonds and blue bonds. These also have specific positive societal and marine-based objectives and increase the pool of options for responsible fixed-income investors.

Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

One way to invest in green bonds

Sajiv Vaid and Kristian Atkinson, co-managers of the Fidelity Sustainable Moneybuilder Income fund invest in some green bonds in their fund. This includes an investment in a green bond issued by Danish offshore wind company, Ørsted, which engages in the development, construction, and operation of offshore wind farms.

The managers bought the bond as a new issue from the company back in 2021. The bond was issued to fund an offshore wind farm project called Hornsea 2. Hornsea 2 is adjacent to Hornsea 1 (the world's largest offshore wind farm). The project is still under construction, but is aiming to have 165 wind turbines operating with a capacity of 1,320 megawatts, which should be enough to power over 1.3 million homes.

The Fidelity Sustainable Moneybuilder Income fund recently evolved its investment policy to focus more on sustainable investment. At least 70% of the fund invests in bonds issued by companies with sustainable characteristics – these are defined by both Fidelity’s proprietary Sustainability Ratings and external ESG scores.

The remainder invests in issuers showing improving sustainable characteristics. The managers engage with these companies to agree improvement milestones and timescales. The managers can invest in derivatives, which adds risk.

More about Fidelity Sustainable Moneybuilder Income, including charges

Fidelity Sustainable Moneybuilder Income Key Investor Information

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Our fund research is for investors who understand the risks of investing and that investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.