We asked BlueBay’s sustainable investing experts how they define impact-aligned debt investing and why this form of sustainable investing might prove so important
"The world is in trouble and we need to shift the pace and scale of change to address this, which means the debt market must play its role," says My-Linh Ngo, BlueBay's Head of ESG Investment. Her concern is not only about the urgency of decarbonising the world economy but also social needs highlighted by the pandemic including upgrading healthcare and education.
"Public debt markets need to help companies that are actively promoting sustainability to scale up, or those companies will forever stay small or mid-cap and we're not going to get the transition we need," she says.
But it's proving hard for the industry to craft affirmative debt strategies that channel capital not just to responsible companies with high Environmental, Social and Governance (ESG) ratings, but specifically to companies rolling out products and services that support key aspects of sustainability such as enabling the circular economy, building human knowledge and skills, or ensuring clean water.
This kind of ‘impact investing' is conventionally defined in private markets in terms of whether the investment makes a tangible, measurable difference that is ‘additional', in that it would not have occurred without the investor's intervention.
But that's a lot easier to claim when investing in, say, the equity of a risky start-up, than when investing in the liquid debt of a more mature company through the secondary debt markets - even though sustainable ventures may need both forms of capital during their life-cycle in order to thrive.
It's a problem that My-Linh has been exploring alongside Tom Moulds, a senior portfolio manager at BlueBay charged with developing BlueBay's first ‘impact-aligned' debt strategy over the last year or so. The strategy will predominantly invest in liquid, public-market corporate debt and that careful choice of phrase - ‘impact aligned' - turns out to be critical to how the pair thought through the challenge.
Ngo agrees that secondary debt investors who direct their capital towards sustainability-building activities can't easily prove conventional additionality. "But you are still allocating capital purposefully to a progressive company and potentially helping to reduce its cost of capital over time, and you can improve its sustainability impact through all the engagement you then have with the company," she says. The fact that some other debt investor might have supplied equivalent capital should not negate these positives.
Calling BlueBay's new strategy ‘impact aligned' rather than ‘impact' signals that, "we're taking care over our terminology while also taking the concept of impact investing just about as far as we can in public bond markets," says Moulds. Ngo says, "the phrase also signals that while this is about investing in companies offering solutions to major world challenges, the strategy is not about concessionary returns or illiquid markets."
Click here to explore the seven key themes that drive the BlueBay team's impact-aligned debt investing
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