As the world’s largest capital market, the bond market has an important role to play in financing the transition to a more sustainable economy. In large part that is because of the unique opportunity that impact bonds create through an issuer’s commitment to undertake specific projects that achieve positive environmental or social benefits.

When investors think of the impact bond market, green bonds often come to mind first. And for good reason: Green bonds continue to dominate issuance and headlines. In October 2020, green bonds passed a major milestone — one trillion dollars in issuance.1

But that is not the full picture on sustainable debt. The impact bond market is no longer niche, and as it continues to grow and evolve, funding is being put to use for a variety of purposes. Additional labels are emerging, including sustainability bonds, social bonds, blue bonds and transition bonds, creating a broader range of impact instruments to consider.

The events of 2020 have accelerated this trend. With the greater emphasis on social issues, driven by the global pandemic and the Black Lives Matter movement, issuance has pivoted toward social and sustainability bonds, and this uptick may be a lasting outcome of 2020.

The growing demand for sustainable fixed income products is driven by investors’ increased interest in finding solutions that combat climate change and social inequality. Also, the growth in issuance is in part being driven by the demand for sustainable development goals (SDGs) funding. In developing countries alone, the United Nations projects that $2.5-3 trillion in investment is needed to achieve its SDGs by 2030.2 And, according to Bloomberg, the European Union could further boost green bond issuance as part of a recovery fund.3

As the impact bond market expands into new fixed income sectors and across more impact themes, so does the portfolio construction playbook and ability to add value. It is now possible to construct more diversified and highly impactful bond portfolios while adhering to fundamental characteristics of standard bond indexes.

Applying sustainability to fixed income

In this section, we will discuss the sustainability aspects of our management approach for fixed income portfolios. We aim to generate competitive returns along with positive societal and environmental impact through portfolios that are well-positioned for the transition to a more sustainable economy. That is why we:

  • invest in impact bonds that finance positive societal and environmental outcomes;
  • utilize the Impax Sustainability Lens, which highlights areas of the market with transition tailwinds and headwinds and helps us identify those with higher opportunity and lower risk;
  • invest in issuers that are developing solutions to global sustainability challenges;
  • mitigate fundamental risks through ESG research and by avoiding higher-risk laggards; and
  • engage with companies to improve their sustainability profiles.

Impact bonds

At Impax, we review the impact potential of all the fixed income securities under consideration for investment. Impact bonds span the spectrum of traditional issuers, and while they reside primarily in the investment grade universe, opportunities exist in the high yield universe as well. We identify a security as an impact bond if its use of proceeds is aligned with one or more of the impact focus areas listed in Figure 1.

Figure 1: Eight impact focus areas most relevant to the fixed income market

Affordable HousingProvides increased access to housing loans or dedicated affordable housing projects
Community DevelopmentSocioeconomic advancement and empowerment for underserved/underbanked communities, mainly in the US
Development FinanceSocioeconomic advancement and empowerment for underserved/underbanked communities, mainly outside the US
EducationProvides increased access to education loans or education infrastructure, including K-12 and higher education facilities.
Environment & EnergyProvides funding for projects that have clear environmental benefits, mainly renewable energy, energy efficiency and other categories identified by the ICMA Green Bond Principles. This category also includes Green Mortgage-Backed Securities.
Gender Equality & Women’s EmpowermentSocioeconomic advancement and empowerment for women and girls worldwide.
Sustainable Infrastructure (US)Proceeds directed to essential services (e.g. healthcare, water/sewer utilities, etc.) that are typically provided by a municipality or federal government agency.
Sustainable Products & ServicesCorporate issuers that generate revenue from products or services that address global sustainability challenges. Issuers are identified through fundamental ESG analysis and external organizations such as WHO and the Access to Medicine Index.
Source: Impax Asset Management

By leveraging this full opportunity set of impact focus areas, we can make an impact on climate change issues, which remain at the forefront of investors’ minds, as well as social topics such as gender and racial equality, poverty alleviation and empowerment. All are important considerations in a sustainable bond allocation.

With the significant uptick in social bond issuance in 2020, we identified issuers that were addressing immediate needs related to the pandemic across a wide range of areas, including those supporting the healthcare industry in their response to the pandemic as well as impact bonds designed to help address inequality and community development.

From an evaluation perspective, as more companies, governments and other entities issue impact bonds, it is increasingly important that we ensure the use of proceeds goes toward projects that improve environmental or social outcomes. For instance, since there are different interpretations about what makes a bond “green,” we look for direct and measurable impact and clear reporting. We aim to ensure the use of proceeds is truly beneficial for the environment or society.

Impax Sustainability Lens

The transition to a more sustainable economy informs our overall fixed income investment process. In our view, this transition will drive growth for well-positioned issuers and create risks for those unable or unwilling to adapt. We believe companies that are well-positioned should possess stronger future earnings, greater resilience to economic challenges and more favorable credit outlooks than companies that are ill-prepared for the transition, which we think will lead to higher risk-adjusted returns.

Improving Outcomes

In 2020 we added Ford Foundation social bonds and LISC (Local Initiatives Support Corporation) impact notes to the Pax Core Bond Fund portfolio. The proceeds from the Ford Foundation’s sale of social bonds will be used to help strengthen nonprofits that advocate for equality, which is important at any time, but especially during a pandemic that hit the United States’ most vulnerable communities hardest. LISC is a national nonprofit community development financial institution that provides technical assistance and financing to underserved US communities across locations in 45 states. Proceeds from its impact notes will further this work.

For the most recent Pax Core Bond Fund holdings click here

A key tool in our process is the Impax Sustainability Lens (Impax Lens or Lens). The Lens facilitates a systematic review of the economic opportunities and risks associated with the sustainable transition at the subsector level and brings greater focus on areas of the market where sustainability opportunities outweigh risks.

Our process tilts away from issuers operating in industries with low opportunity or those at greater risk when it comes to the transition to a more sustainable economy, for example, energy sector issuers significantly involved in the production of high-carbon commodities.

Conversely, we tilt toward high-opportunity and low-risk subsectors that are better positioned to benefit from the transition, such as sustainable solution providers. High priority sectors include, for example, healthcare equipment suppliers that are well-positioned to serve a growing aging population that demands personalized healthcare services, and companies that provide solutions for municipal drinking water and wastewater systems.

ESG risk mitigation

For all bonds under consideration we take a close look at the issuing company’s overall ESG profile. There is a growing body of evidence that shows the materiality of ESG risk and growing recognition that ESG-managed portfolios can potentially offer strong risk-adjusted returns.

We also believe that ESG analysis is an effective way to identify material credit risks and helps us avoid issuers that are vulnerable to downgrades and refinancing risk. ESG analysis can also help identify issuers that are improving in their sustainability profiles, which could drive tighter spreads over time.

A Bank of America report5 found that higher ESG scores tend to correlate with higher credit quality ratings, and the MSCI study “Foundations of ESG Investing in Corporate Bonds6 suggests ESG ratings can add financial value when used in addition to credit ratings to assess credit risks and build corporate bond portfolios. Specifically, the MSCI study found “high ESG” consistently realized lower volatility compared to “low ESG” across US and European investment grade and high yield markets, even when adjusting for credit factors, including credit ratings.

We favor companies that understand key ESG risks and have appropriate policies and procedures in place to mitigate them. We believe that because these companies are more strategic in their thinking, they will incur fewer regulatory challenges and fines and, overall, will be more resilient in the face of change.


Lastly, while engagement is a tool not commonly used by most fixed income managers, it is a key part of our sustainable investing approach. As both an equity and fixed income manager, Impax benefits from crossover engagements that add insight and can potentially influence our view of an issuer. And since bondholders are an essential source of financing, company management tends to be inclined to maintain good relationships and have meaningful engagement. The benefits are twofold — engagement helps provide insight into a company’s management of material ESG issues, and it can positively influence an issuer’s ESG transparency and performance going forward.

For example, we supported a shareholder resolution filed at a large US-based cable company. The resolution sought increased transparency on key sustainability issues. We wrote a letter of support to that company’s investor relations team, explaining that comprehensive sustainability reporting is additive to our standard credit analysis and, in our view, may help stem mismanagement of significant regulatory, legal, reputational and financial risks. Nearly a third of shareholders supported the proposal at the company’s annual meeting, which we believe is a strong measure of support.

Impax Fixed Income History and Innovation

With 20 years in sustainable fixed income investing, Impax has witnessed, and in some instances helped shape, market innovations firsthand. In 1999, Impax launched the first high yield bond fund in the US to integrate ESG factors — the Pax High Yield Bond Fund. Impax was an early investor in the green bond market, purchasing Bank of America’s first green bond transaction in 2013. And we have developed proprietary tools such as the Impax Sustainability Lens that help us identify and classify risks, which helps generate investment ideas and spot hidden risks.

Opportunities in an evolving market

We believe the transition to a more sustainable global economy provides an attractive backdrop for fixed income investment. In our view, well-positioned issuers should outperform their higher risk peers, and the evolving impact bond market presents new opportunities to drive positive societal and environmental outcomes, improve portfolio diversification and risk management, and generate competitive returns.

Learn more about fixed income investing at Impax.

1 Bloomberg NEF

2 Roadmap for Financing the 2030 Agenda for Sustainable Development, United Nations, July 2019.

3 Bloomberg NEF

4 The Global Industry Classification Standard (GICS) is a widely recognized industry standard for assigning a public company to the economic sector and industry group that best defines its business. It was developed jointly by MSCI and Standard & Poor’s and is used by the MSCI indexes.

5 “ESG in Fixed Income – Taking Credit,” Bank of America, May 5, 2020.

6 Foundations of ESG Investing in Corporate Bonds, MSCI Research, November 11, 2020.

Diversification does not assure a profit or protect against a loss in a declining market.

Investments involve risk, including potential loss of principal.


Anthony Trzcinka, CFA®

Senior Portfolio Manager

Anthony (Tony) Trzcinka is a Senior Portfolio Manager at Impax Asset Management LLC, the North American division of Impax Asset Management Group and investment adviser to Pax World Funds.

He is a Senior Portfolio Manager of the Core Bond Strategy, which includes the Pax Core Bond Fund. Tony is also a member of the Pax Sustainable Allocation Fund portfolio management team. A pioneer in sustainable fixed income investing, Tony has been managing strategies investing in impact bonds for over 10 years.

Tony has been responsible for multiple strategies since joining the firm in 2003. Before Impax, Tony spent three years as an Assistant Vice President at AEW Capital Management, where he worked in a Senior Analyst role. He began his financial services career as an analyst in 1999.

Tony is a CFA® charterholder and a member of the Boston Security Analysts Society. He holds an MBA from Northeastern University and a Bachelor of Arts from the University of Massachusetts.

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Peter Schwab, CFA®

Senior Portfolio Manager

Peter Schwab is a Senior Portfolio Manager at Impax Asset Management LLC, the North American division of Impax Asset Management Group and investment adviser to Pax World Funds.

He is a Senior Portfolio Manager of the High Yield Bond Strategy, which includes the Pax High Yield Bond Fund. Peter is also a member of the Pax Sustainable Allocation Fund portfolio management team.

Prior to joining the firm in 2015, Peter was a Managing Director on the High Yield Bond and Loan Team at Goldman Sachs Asset Management. Prior to that he was an Investment Associate in the High Yield Group at Putnam Investments and a member of the High Yield Research Group at Donaldson, Lufkin and Jenrette.

Peter has a Bachelor of Arts in history and economics from Union College and an MBA in finance from Columbia Business School. He is a CFA® charterholder and a member of the New York Society of Security Analysts.

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Yvonne Tai

Vice President, Senior Fixed Income Analyst

Yvonne Tai is Vice President at Impax Asset Management, the North American division of Impax Asset Management Group and investment adviser to Pax World Funds.

She is a Senior Fixed Income Analyst for the Core Bond Strategy, which includes the Pax Core Bond Fund. Yvonne began her investment analysis career in 1997 and has extensive experience in securitized products.

Prior to joining Impax in 2017, Yvonne served as Assistant Vice President at Moody’s Investors Service, Inc. where she held a Lead Analyst role, covering residential mortgage-backed securities. Before that, she was Vice President, Senior Credit Analyst at State Street Global Advisors, covering securitized products. Yvonne has also structured collateralized loan obligations at Jefferies and Company, Inc. She started her career as an agency Mortgage-backed Securities Analyst at Fischer Francis Trees & Watts.

Yvonne has a Bachelor of Arts in mathematics and physics from Bryn Mawr College, where she graduated magna cum laude. She also has a Master of Business Administration in finance from Columbia Business School.

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Greg Hasevlat

Senior Sustainability and ESG Analyst

Greg Hasevlat is a Senior Sustainability and ESG Analyst at Impax Asset Management LLC, the North American division of Impax Asset Management Group and investment adviser to Pax World Funds. He evaluates the environmental, social and governance performance of companies for potential inclusion in the firm’s portfolios.

He is also involved in shareholder and public policy engagement and coordinating the firm’s sustainability reporting. Greg is a member of the Impax Gender Analytics Team.

Prior to joining the firm in 2009, Greg was Government Affairs Representative at a New Hampshire‑based consulting firm, where he represented clients from various industries before the New Hampshire legislature.

Greg received a bachelor’s degree in English from the University of New Hampshire and an MBA from Southern New Hampshire University.

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