Case study by Triodos Investment Management 

AuthorAndrea Palmer, Product Specialist, Impact Equities and Bonds

Market participant 

Asset Manager

Total AUM

US$4.7 billion (as at June 2018)


US$3.1 billion (as at September 2018)

Operating country


Action area:

  • Organisational approach

The investment approach

Triodos Investment Management is an impact investment firm that operates on the conviction that capital can be used to facilitate intentional and measurable positive change. This philosophy has been embedded into all Triodos Sustainable Bond Fund investment activities and the overall thesis underpinning its investment approach.

In April 2018, our listed equity and bond funds initiated a revised and enhanced investment strategy, moving away from the existing ESG best-in-class and exclusion approach to a strategy that cherry-picks corporate and sub-sovereign issuers and issues that offer commercial solutions to global sustainability challenges.

The investment process

Our approach to impact investing through listed bonds requires us to maintain an understanding of the chain reactions prompted by global sustainability challenges, and to establish a long-term vision as to what solutions can most effectively, and most sustainably, solve them. Our in-house, and often qualitative, research guides the investment process by developing opinions of each issuer’s commitment to sustainability and contribution to our sustainable transition themes through their products, services and/or operations. For sovereign or sub-sovereign green and/or project bonds, we assess the use of proceeds and overall impact against our thematic contribution screening. We refer to both of these groups as impact bonds. The Triodos Sustainable Bond Fund seeks investments that address the following themes:

  • sustainable food and agriculture;
  • renewable resources;
  • circular economy;
  • sustainable mobility and infrastructure;
  • innovation for sustainability;
  • prosperous and healthy people; and
  • social inclusion and empowerment.

After we confirm that the issuer’s business positively contributes to our themes, we analyse it against our group process, product and precautionary minimum standards. In this step, our analysts assess the issuer to ensure its business model does not hamper market adoption of sustainable solutions. The highest risk companies in terms of ESG and commercial viability are removed from the investment universe, as it is unlikely that these companies would pass our minimum standards screen. In short, we apply our minimum standards for three reasons: 1) to ensure companies meet our fundamentals and have no negative environmental or societal impact 2) to remain divested from companies whose business practices hinder the sustainable transition, and 3) to embed ESG and company longevity risk management into our company analysis.

Once an issuer has passed both levels of sustainability criteria – i.e. the screen for thematic contribution (positive inclusion) and minimum standards (negative exclusion) – the team reviews the fundamentals of the issuer and the issuance, including the credit rating and spreads. The Triodos Sustainable Bond Fund is constrained to euro-denominated, investment-grade instruments, as defined by third-party rating agencies, so the investment universe is limited to this market segment (see below). We do not recalibrate third-party credit ratings with ESG or impact data as this stage is embedded in the analysis of the first and second steps of the investment process: positive inclusion and negative exclusion. Each issuer in the portfolio is reassessed at least once every 12 months. Additionally, for liquidity risk management, the Triodos Sustainable Bond Fund also invests in sovereign bonds. To be eligible for the portfolio, the issuer must be a member of the European Union and demonstrate the highest standards of a functioning democracy.


Investment framework

Source: Triodos Investment Management

The investment outcomes

An example of a bond that was included in the portfolio based on its positive contribution was ALD Automotive. ALD has one of the best structured and most sophisticated impact bond frameworks we have encountered, and its UOP (eligible green vehicles) is clearly aligned with our sustainable mobility and infrastructure theme. Its quality of impact reporting is very high: measurement is based on lifecycle analysis, developed with a third-party consultant which considers the impact of the production, use (including fuel and/or electricity production) and end-of-life treatment of cars. The science-based methodology is available in the framework for investors to evaluate. These impact measurements drive the selection of the assets to be included in the impact bond asset pool, which is very rare and demonstrates a serious intention to avoid greenwashing as assets such as electric vehicles in countries with carbon-intensive electricity grids will not be eligible for the asset pool. In addition to complying with the Green Bond Principles, the ALD framework is aligned with a more recent framework called Positive Impact Finance (UNEP FI) and is CBI-certified.

We invested in the bond when it was issued (primary). ALD’s long-term issuer credit rating was upgraded to BBB+ from BBB by S&P Global Ratings on 24 October 2018, after its outlook was revised from stable to positive on 19 October 2017. Also, Fitch assigned an A- with a stable outlook in October 2018.

Key takeaways

We have made progress since our initial investment approach based on best-in-class and exclusion as we determined that it was not able to deliver the strong positive impact that we demanded as an impact investor. This conclusion was drawn with evidence that the ESG scores were often incomparable across ESG rating agencies’ outputs, were biased towards large companies, and were, in summary, a translation of management quality and policy setting. The ESG lens is an effective strategy for risk-return optimisation, but with our new approach, we are better positioned to steer capital toward the companies that really innovate and drive systems change.



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    Shifting perceptions: ESG, credit risk and ratings: part 3 - from disconnects to action areas

    January 2019