Investors invested $ 54 billion in bond funds specializing in environmental, social and governance issues in the first five months of 2021, even as concerns about possible “greenwashing” intensified.

After several years of bumper sales of ESG-focused equity products, investors are now turning to fixed-income funds, according to figures compiled by Morningstar, the data provider.

In total, sales of all ESG bond funds reached $ 54 billion in the year up to the end of May, compared to nearly $ 68 billion for 2020 as a whole. Data covers both open-ended and open-ended funds. exchange traded funds around the world.

Assets under management in products rose 14% to $ 374 billion between January and May, as they nearly tripled in three years. In 2020 alone, assets jumped 66%, compared to a 12% increase in assets for the entire fixed income universe.

Soaring demand has sparked a wave of new fund launches, as businesses and governments have unveiled swathes of social and green bonds to cash in on the trend. But growing interest has sparked concerns about so-called greenwashing, including fears that some bond funds may not be as sustainable as they claim and that fund managers will struggle to decipher their ESG credentials. .

Jose Garcia-Zarate, Managing Partner at Morningstar, said there is “a clear trend in favor of ESG growth, especially in Europe”, but many fund managers are struggling with “how to apply ESG principles to certain bond markets “. He said attempting to label government bonds with ESG criteria has proven “very, very tricky” as there is “still no consensus on how to classify governments and countries.”

Demand for ESG bond funds is concentrated in Europe, but other regions were starting to generate interest, Garcia-Zarate said. In the United States, sales of ESG bond funds amounted to $ 4.75 billion in the first five months of 2021, compared to $ 5.92 billion for the whole of last year.

There is also a growing demand for passively managed ESG bond funds, which typically track indexes. More than $ 17 billion has been invested in these products this year, surpassing last year’s record of $ 15.6 billion, according to Morningstar.

Colin Purdie, Director of Investments for Liquid Markets at Aviva Investors, which recently launched a bond fund focused on climate transition, said: “ESG dynamics are everywhere. . . It is not surprising that we are seeing fund launches. “

Morningstar data shows that 122 new ESG bond funds were launched last year, with 44 new offerings in the first quarter of 2021.

But Purdie added that there were challenges for fixed income investors when it came to ESG: “ESG is thought to be easier in stocks and one of the reasons is the data. “, did he declare.

In areas such as high yield markets or emerging markets, generally viewed as more speculative investments, disclosure of ESG data remains an issue. “Credit requires higher resources to ensure you have the information you need,” he said.

Despite this, issuers rushed into the market with new, long-lasting debt. BloombergNEF data shows $ 245.3 billion in green bonds was issued this year, $ 83.8 billion in sustainability bonds and an additional $ 129.2 billion in social bonds. In contrast, in the five months leading up to the end of May 2020, $ 91.44 billion in green bonds were issued, along with $ 15.21 billion in sustainability bonds and $ 27.87 billion in bonds. social.

Bryn Jones, who manages the Rathbone Ethical Bond fund, one of the oldest and largest ESG fixed income funds, said there had been a “sharp increase in the supply” of green and social bonds during his 17 years at the helm of the fund.

He said the demand for ESG bond funds was driven by a combination of regulations, such as efforts in the UK to get pension funds to consider the impact of ESG on investments, as well as new cohorts of investors, such as millennials and young investors who are interested in seeing their money do good and generate returns.

Despite the rapid increase in demand for ESG bond funds, they still only represent less than a fifth of total sustainable fund assets, according to Morningstar.

A survey of Nordic and Dutch investors by NN Investment Partners in May found that nearly half of those polled say green bonds are their preferred fixed income option. Some 81 percent of Nordic and Dutch pensions said they were already invested in green bonds.

But respondents also voiced concerns about corporate greenwashing, saying it was the biggest barrier to investing.

Simon Bond, director of responsible investment portfolio management at Columbia Threadneedle Investments, said that while there have been a few cases where issuers have been accused of this, the problem has not been widespread. But Bond added that the growing attention to greenwashing was positive.

“That’s a good thing. It lights up that dark corner. It’s pretty hard to hide when that light shines in that corner of ESG,” he said.