Research proposal advocates for the application of impact-focused strategies in the fixed income market
In a groundbreaking move, a new taxonomy for impact fixed income strategies has been proposed in the research paper, "Scaling Solutions: The fixed income opportunity hiding in plain sight", published by Builders Vision, Tideline, and BlueMark. This taxonomy aims to create a shared language for impact investing within fixed income, addressing a significant barrier to scale.
The taxonomy is structured around three distinct categories:
1. **Responsibility-focused securities:** These securities are selected, managed, and measured based on the issuer's commitment and accountability to responsible business practices. The emphasis is on the issuer's overall responsible behavior.
2. **Impact-aligned securities:** Selection and management are based on the revenues or use of proceeds (UoPs) directly contributing to addressing widely accepted social and environmental challenges. This aligns the investment with broader impact themes.
3. **Impact-centered securities:** Here, securities are chosen based on how their revenues or UoPs advance an investor's own specific, well-evidenced impact strategy. This category reflects a more tailored and intentional pursuit of impact goals by the investor.
Jade Huynh, the report's lead author, believes that this taxonomy is driven by the demand for impact fixed income, particularly in addressing the challenges of climate transition. Huynh and her co-authors were motivated by the trend of allocators applying an impact lens across all asset classes, not just private markets.
The taxonomy aligns with widely accepted impact investing frameworks, such as the Operating Principles for Impact Management, facilitating integration into existing impact methodologies and improving clarity for institutional investors looking to scale impact fixed income investments.
This new taxonomy is significant as it responds to the gap between the fixed income market's focus on defining impact at a security level and allocators' focus at a strategy level. It also highlights the potential of fixed income as an ideal asset class for channelling large volumes of capital into climate transition solutions.
The green, social, and sustainable bond market has shown resilience, adding $1 trillion in new issuance each year. With this momentum, the market is set to exceed $6 trillion in cumulative issuances in 2025. The paper argues that impact investing must widen its focus beyond private markets to scale and address global social and environmental challenges.
The proposed taxonomy offers perspectives on investor- or strategy-level impact within fixed income, provides case studies of six asset managers, and offers actionable resources for allocators. It is a step towards unlocking the potential of fixed income as a solutions-oriented asset class for impact investing, moving beyond its conventional role of risk mitigation and yield generation.
[1] Builders Vision, Tideline, and BlueMark. (2021). Scaling Solutions: The fixed income opportunity hiding in plain sight. Retrieved from https://www.buildersvision.org/sites/default/files/2021-04/BuildersVision-Tideline-BlueMark-Scaling-Solutions-The-fixed-income-opportunity-hiding-in-plain-sight.pdf [2] Impact Investing Policy Collaborative. (2021). State of the market 2024. Retrieved from https://thegiin.org/publications/state-of-the-market-2024/
- Venture capital firms may find the taxonomy proposed in the "Scaling Solutions" paper beneficial, as it offers a shared language for impact investing within fixed income, potentially opening up new opportunities for investing in energy transition projects.
- The taxonomy's focus on impact-centered securities could attract development finance institutions seeking to channel capital towards businesses involved in renewable energy solutions, aligning with their mission of supporting sustainable economic development.
- Private equity firms could also leverage the taxonomy's guidance on impact-aligned securities to assess investment opportunities in the energy sector that contribute to climate transition objectives, expanding their portfolio beyond traditional risk mitigation and yield generation.
