The research by Builders Vision, Tideline and BlueMark highlights features that make fixed income suited to impact investing and puts forward a new taxonomy to help investors with their impact fixed income strategy.
A new research paper makes the case for impact fixed income, highlighting the opportunities the asset class can provide investors.
The paper, Scaling Solutions: The fixed income opportunity hiding in plain sight, was published following a collaboration between Builders Vision, an impact platform of investors and philanthropists, Tideline, an impact consulting practice and BlueMark, the impact intelligence provider.
It argues that with a market size of $1.57trn (€1.33trn), representing just half of one percent of total investable assets globally, impact investing must widen its focus beyond private markets if it wants to scale and meaningfully address the world’s biggest social and environmental challenges.
Jade Huynh, the report’s lead author and a senior associate at Tideline, told Impact Investor that the co-authors were motivated to write the report in response to the trend of allocators increasingly applying an impact lens across all asset classes within their portfolios, and not just in private markets, where most impact investing resources are currently concentrated.
“In carrying out the research for this report, we were struck by the disparity between fixed income’s more ‘mundane’ framing as an asset class and its actual power as an instrument of impact. Fixed income is already delivering impact at tremendous scale, speed, and transparency, yet popular perception has yet to catch up with its potential,” she said.
Key features
The authors describe “a marked lack of discourse on how investors can and should leverage fixed income, the largest asset class in the world, as an instrument of impact”, highlighting the asset class’s key features, which they say make it ideally suited to impact.
These include its responsiveness – described as the capacity to meet urgent needs in real time. It also includes scalability – fixed income’s ability to mobilise capital at a scale necessary to meet the world’s largest challenges, and precision – its capacity to generate targeted and specific impacts, including through localised, place-based initiatives.
The paper also offers the authors’ perspective on what constitutes investor- or strategy-level impact within fixed income, summarising its distinguishing characteristics, and provides in-depth case studies of six asset managers in impact fixed income, including Community Capital Management, EdenTree and Nuveen, as well as a series of actionable resources that allocators can use to scale up investments in the asset class.
Growing demand
Whilst fixed income’s financial characteristics have eclipsed its impact potential in the eyes of most investors, the report found a growing number of institutional asset allocators are recognising the asset class’s potential to generate both impact and financial performance. The authors highlight the GIIN’s 2024 State of the market report, which finds that for these investors, the largest impact investing allocations are to fixed income (44%), far exceeding the next highest allocation to private equity, at 18%.
Other evidence put forward in support of impact fixed income is the green, social and sustainable bond market or labelled bond market, which has shown resilience despite turbulent economic conditions, adding $1trn in new issuance each year and which is set to exceed $6trn in cumulative issuances in 2025.
Huynh said the authors believe demand is being driven by the nature of solutions needed to drive the climate transition, which she said requires investment in proven, physical, and capital-intensive technologies.
“Fixed income is an ideal asset class for channelling large volumes of capital into these solutions, and as evidenced by growing issuance of green bonds year over year, we expect this demand to continue to grow,” she said.
A new taxonomy
The research also calls out the lack of “a shared language between the fixed income and impact investing markets” as an important barrier to scale.
Building on existing bond and fund labelling regimes and voluntary standards, the authors propose a new taxonomy for impact fixed income strategies, which they say will make it easier for investors to define and categorise their approach.
The proposed taxonomy is based on three categories, including responsibility-focused securities, impact-aligned securities, and impact-centred securities.
“The fixed income market has put most energy into defining what impact is at a security rather than at a strategy level, which – in our experience – is where allocators are most focused.
“We developed the taxonomy to respond to this gap, and we designed it and other frameworks in the paper to align with widely accepted impact investing frameworks (such as the Operating Principles for Impact Management) out of the conviction that existing tools more widely used in other asset classes are also applicable to fixed income.”
