Why sustainable fixed-income investors can't ignore carbon ratings

Here are some key takeaways from the report

• Sustainable bonds are intrinsically connected with carbon markets, though this structural link remains widely underappreciated; understanding how to measure and manage the risks associated with such interconnected dynamics should become an imperative for fixed-income investors and portfolio managers.

• Green bonds can finance projects that generate carbon credits, sustainability-linked bonds might have their targets met through credit purchases rather than operational decarbonisation, and outcome bonds tie investor returns directly to credit delivery - in each case, the bond's credibility depends on the underlying carbon credits' quality and the likelihood that they will actually be issued.

• More sophisticated analytical tools, greater levels of transparency, incoming ESMA oversight of carbon rating agencies, and the rapid expansion of compliance schemes are all strengthening the institutional foundations of carbon markets, giving fixed-income investors the capability and confidence needed to engage with them more directly.