MORE than 70 per cent of asset managers said that sustainable bond structures are their first means of raising capital to help meet their net-zero targets, according to a survey by banking group NatWest.

Examples of these sustainable bond structures include use-of-proceeds bonds, green securitisation and sustainability-linked bonds.

Out of 225 asset managers surveyed by NatWest in January this year, about 26 per cent said that use-of-proceeds bonds, which include green, social and sustainability bonds, are their go-to financing instruments. Use-of-proceeds bonds get their respective labels if the proceeds raised will be used only for “green” or “social” activities.

Among the survey participants – who were sampled equally from North America, the Asia-Pacific, the United Kingdom and Europe – 23 per cent preferred sustainability-linked bonds (SLBs), which do not restrict how the proceeds are used, as in the case of use-of-proceeds bonds. Instead, SLBs incur a higher interest rate for a borrower that fails to meet sustainability targets.

An almost equal number (24 per cent) of asset managers thought that green securitisation was the most helpful for them to reach their net-zero targets. Green securitisation refers to any asset-backed security with proceeds raised to finance loans for green infrastructure.

When it comes to mitigating physical risk from climate changes, close to 80 per cent of investors said that they rely on either one of these three financing structures to raise funds for such purposes, with the highest proportion (34 per cent) selecting use-of-proceeds bonds as their instrument of choice.

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However, the survey report noted that 28 per cent of respondents – described in the report as “a meaningful number” – indicated that conventional bonds are their preferred instruments for reaching net-zero goals, while 22 per cent indicated the same for mitigating physical risk.

“This perhaps reflects some scepticism over green, social, sustainability and sustainability-linked bonds amid growing concerns over greenwashing,” the report said.

It noted that asset managers surveyed were on the lookout for assurances that solidify a bond’s green credentials, as greenwashing concerns have tainted the reputation of green debt instruments for some investors.

Nearly half, or 47 per cent, said SLBs that include only targets approved by the Science-Based Targets initiative were among the top innovations that could help asset managers achieve their net-zero targets.

“Investors need to validate their climate targets and increasingly prefer the external verification of an issuance that helps them to do so,” said the report.

Given the preference for use-of-proceeds bonds by investors when it comes to mitigating physical risk, the survey also showed that asset managers want to see improved impact reporting by corporate issuers of such bonds.

“This could include clearly defined impact reports with asset location information, allocation of capital information and standardisation of impact metrics between issuers,” said the report.

Survey respondents also agreed that more guidance is needed from regulators and market associations to drive innovation in green and sustainability-linked bonds.

One way they can do that is to mandate that any bond issuer must disclose information on its climate transition.

“The overriding message to businesses is to improve existing issuances with greater transparency, additionality and credibility, rather than innovate across the product spectrum. A clear sustainability strategy, combined with reporting in enhanced detail, contributes to an issuer’s credibility and makes both conventional and labelled bonds more attractive,” said the report.