June 7, 2022 | Stamford, CT — ESG is having a significant impact on what institutional bond traders trade, but not on where or how they trade. 

Almost two-thirds of institutional bond traders in the U.S. say they traded green bonds in the past year, with another 8% saying they plan to start trading the instruments in the next 12 months. 

“The rapid growth of green bond trading volumes among institutions reflects both the record issuance of more than a half trillion dollars in green bonds in 2021 and the increasing demand among investors of all types for sustainable assets,” says Kevin McPartland, Head of Research at Coalition Greenwich Market Structure & Technology and author of The Role of ESG in Bond Trading.

The new report examines how the spread of environmental, social and governance standards across the investment universe is affecting U.S. bond markets and concludes that, although ESG is influencing institution’s decisions about what to invest in and trade, it is not yet having much of an impact on their choice of where they trade or whom they trade with. 

Only 4% of traders say ESG is having an impact on trading venue selection while more than half (53%) of institutions have policies that encourage trading with minority-owned counterparties.

ESG scores over time may start to influence counterparty choices, especially if regulations increasingly drive the market to consider such data. For now, however, most buy-side traders are bound by fiduciary rules that require them to find the best possible price for the given bond. 

“While the environmental, social and governance habits of the trading venue facilitating that price discovery and the dealers providing those prices matters to the world at large, there is nothing to suggest that ESG scores impact execution quality,” says Kevin McPartland.