Bond Villains
How the bond markets fan the flames of the fossil fuel industry
Sophie Flinders
& Adrienne Buller
Sophie Monk
A new database in partnership with the Toxic Bonds network.

Bond Villains: How the Bond Markets Fan the Flames of the Fossil Fuel Industry


What Is a Corporate Bond?

When companies need to raise funds, they have two choices: equity financing or debt financing. Equity financing means giving up a percentage of ownership in the company to investors by selling shares. Debt financing means choosing to borrow money over an agreed period of time, with interest. There are two main options for debt financing: obtaining a loan from a bank or issuing a bond.

Think of a bond as an IOU (I owe you): investors (bondholders) lend money to a company (bond issuer) for a set period of time (maturity period) in exchange for regular interest payments (coupon rate). After the maturity period, the principal (also known as face value or par value) is repaid to the bondholder. For companies to access money via the bond market, they rely upon a chain of financial institutions: investment banks (underwriters), investors (bondholders) and credit rating agencies.

Issuers: companies issue bonds to borrow money for general operations, capital intensive projects and refinancing other debt. Issuing bonds is attractive to companies because: they offer less scrutiny than loans (direct project financing); they can borrow large sums of money at potentially cheaper rates than loans; and companies don’t have to hand over any control (equity) of the company to investors.

Banks (underwriters): acting as an underwriter, investment banks manage all aspects of the bond issuance process. Banks advise companies issuing bonds and help market bonds to investors. Issuers rely on banks’ credibility to gain access to potential investors. Underwriting bonds allow banks to profit without carrying any risk on their books in the way that making a private loan would. Instead, risk is passed on to investors.

Investors (bondholders): When an investor buys a bond from a company, they are lending to fund its activities. Investors or bondholders are typically asset managers, pension funds, insurers and private equity companies.

Credit Rating Agencies (CRAs): For a bond to be issued, the credit worthiness of the issuer needs to be rated. Three credit rating agencies (CRAs) dominate 95% of the credit rating business — S&P, Moody’s and Fitch. They tell potential investors how risky a bond is. The lower they deem the risk, the cheaper and easier it becomes for companies to secure debt. Though these ratings are ostensibly independent, CRAs are paid by the same companies they rate.

Though both bonds and loans are forms of debt financing, bonds are different from bank loans in several important respects. While a loan is a direct relationship with agreed terms between a bank and the borrower, corporations issuing bonds sell them on what’s known as the “primary” market to any interested investors.

Once purchased, bonds are often subsequently traded between investors on the “secondary market”, like shares and other financial assets. Bonds are also substantially more “liquid” — easy to exchange for cash or other assets — than loans. Crucially, bond markets are subject to less stringent regulation and oversight than bank loans or equity shares.

When a company issues a bond, money is transferred from the initial buyers of the bond to the issuing company. These transactions constitute the “primary market”. The primary market is the point of maximum leverage for increasing the cost of capital for companies or disrupting bond issuance entirely. When bonds are later traded between investors on the “secondary market”, money exchanges hands between investors rather than from the investor to the issuer.

How Does a Corporate Bond Work?
Hover over the arrows the view each part of the bonds issuance process
Bonds have several key features:
Face value: Each bond has a face value, which is the amount of money the issuer promises to repay to the bondholder when the bond matures.
Coupon rate: The issuer also sets a coupon rate, which is the interest rate that the bond issuer will pay to the bondholder over a set period, usually annually or semi annually. The coupon rate is fixed upon issuance, which is why bonds are also referred to as fixed income securities. The coupon rate depends on the issuer’s credit rating — a measure of how likely the firm will be able to repay their debts, determined by a credit rating agency — with higher risk bonds paying higher rates.
Maturity date: Bonds have a specific maturity date, which is the date when the issuer must repay the bondholder the face value of the bond. It might range from a few months to several years or even decades. It’s very difficult to get advance notice of new bond issuance. The most notice the public usually gets is a few days before the bond is issued. However, companies need to keep refinancing their debt and seek continuous access to debt markets. Bond maturity dates therefore provide a more reliable indicator around when bonds will be issued to refinance the debt. Companies will typically seek to refinance their bonds up to a year in advance of their bond maturity dates.

Bonds are a major element of financial market activity, acting as a critical source of financing for corporations as well as a major component of financial portfolios. Bonds are often considered safer investments than, for instance, stocks because they offer not only a fixed income stream through their coupon rates, but also the repayment of the principal amount issued, making them a major asset in pension fund portfolios.

Bonds Are a Growing Component of UK Pension Fund Portfolios
UK pension fund allocation 2012-22 (Defined Benefit and Defined Contribution)
Source: Common Wealth based on Thinking Ahead Institute

Bonds Play a Major and Growing Role in Sustaining the Fossil Fuel Industry

Corporate bonds are a critical source of finance for coal, oil and gas companies, yet in comparison to the stock market, the bond market has been overlooked. The fossil fuel industry has increasingly used the bond market as a relative safe haven to raise large sums of money for expansion, while also avoiding the comparative scrutiny given to bank lending and the stock markets.

Since the 2008 financial crisis, there has been a general trend in the corporate sector towards raising debt via bonds rather than traditional bank lending. This trend is very clear within the fossil fuel sector in particular, as shown in the following chart, with over half of coal, oil and gas financing coming from bond issuances.

Proportion of Global Fossil Fuel Fundraising by Asset Class
Note: Chart by Common Wealth
Source: TF Cojoianu et al

The chart below shows the cumulative total bond issuance by the fossil fuel industry since 1990, highlighting both a post-2008 surge, and a steady upward trajectory in issuance even after the Paris Climate Agreement in 2015.

Bonds Issued by Coal, Oil and Gas Companies
Cumulative total bond issuance, 1991-2023
Source: Urgewald, LSEG

What is a toxic bond?

As defined by the Toxic Bonds network, “toxic bonds” are any bond issued by fossil fuel companies to fund their expansion plans. These bonds are vital to keeping the fossil fuel industry alive, by enabling the continued expansion of fossil fuel extraction, which in turn fuels the climate crisis. In this interactive database, we map the bonds issued by the top global fossil fuel producers (as determined by Urgewald’s Global Coal, Oil and Gas Exit Lists) as well as the investors with the largest holdings in these bonds, to identify the firms betting on and reaping returns from climate chaos.


Bond Villains: Who Are the Top Investors in Toxic Bonds?

The network diagram below highlights the top global investors, or bondholders, in fossil fuel industry bonds. In terms of the value of their total investment, the US asset management giants BlackRock and Vanguard are a league ahead, partly reflecting their overall dominance in the asset management industry, with combined assets under management surpassing the next five largest asset managers. Their toxic bond holdings stand at a combined total of $55.7 billion.

BlackRock and Vanguard are followed closely by Prudential, a US-based insurer and PIMCO, a fixed-income (bonds) speciality investor that belongs to the larger Germany-based financial group, Allianz.

Explore the diagram below to see how these top investors allocate to the bonds of the global fossil fuel industry.

How Top Asset Managers Finance the Fossil Fuel Industry
Use the dropdown selector or hover over a circle to view
Note: Designed and built by Sophie Flinders. To view the network map in a different tab, click here.

While only the largest four investors are displayed above, the global asset management industry is vast, with the top twenty asset managers holding $149.3 billion in fossil fuel bonds. Select from the drop-down menu in the chart below to view each asset manager’s fossil fuel bond investments on a company by company basis.

Asset Managers' Top Bondholdings
Total par held by top investors (USD), March 2023
Source: Urgewald, LSEG

The chart below looks at the same dataset in a different way, highlighting the top bondholders in each company covered by our data universe. Select a fossil fuel company to view its top bond investors and the size of these investors’ total holdings in that company.

Top Bondholders in Each Company
Total par held by companies' top investors (USD), March 2023
Source: Urgewald, LSEG

As highlighted in the network diagram above, some investors are simply much larger than others, with BlackRock and Vanguard each commanding nearly $10 trillion in assets under management, while other investors in our dataset are considerably smaller. Thus, BlackRock, Vanguard and other asset management giants frequently top the list of bondholders in each fossil fuel firm. To add another layer of insight to this database, the chart below shows the exposure to fossil fuel bonds of the top twenty asset managers relative to the size of their overall bond portfolio, highlighting asset managers who are uniquely exposed to these toxic assets.

Toxic Bond Exposure as Proportion of Fixed Income AUM
"Toxic" bond holdings by proportion of total fixed income assets under management (latest financial year)
Source: Urgewald, LSEG, Common Wealth
Note: All AUM figures pertain to 2021, the most recent year with the highest coverage among the groups under consideration. 2021 fixed income AUM figures for Fidelity could not be located, so these figures reflect 2022 AUM.

Clarifying note: In the chart, we show the Allianz financial group as a combined group (including PIMCO, the bond-focused investment company that belongs to the larger Allianz group), as well as with PIMCO and the remainder of the Allianz group separated out. Nuveen is the asset management arm of TIAA financial group.


Betting on Catastrophe: Long-Dated Bonds and Stranded Assets

An important characteristic of bonds is their maturity date — the point at which the principal must be repaid. For some bonds, this is short (a few months), while others might last twenty five years or longer. The length of a bond has particular importance with respect to the fossil fuel industry and its role in driving an accelerating climate crisis.

There is a chance that fossil fuel assets — oil wells, coal mines, power plants etc. — will become redundant as governments across the world attempt to decarbonise within the urgent timelines demanded by limiting global temperature rise to 1.5C. These stranded assets are risky to investors who have financed them through stocks and bonds, like asset managers, banks and pension funds. Pension funds and insurers often rely on long-dated bonds to pay out pensions and life insurance, and therefore, they are at risk of stranded assets from their fossil fuel bond holdings. Asset managers risk not being able to sell their large holdings in fossil fuels on the secondary market before the assets become worthless. A recent study found that if net-zero emissions targets are reached in line with the Paris Agreement, half of the world’s fossil fuel assets could become worthless by 2036. However, it is worth noting that for the time being, the industry appears to be betting against this likelihood, with fossil fuel giants making major investments in new assets and exploration.

The chart below shows the total face value of bonds that have a maturity date within a given year. The total face value peaks in 2024, with 640 bonds set to mature this year with face value totalling $196.7 billion which then falls steeply to $27 billion in 2036. The total face value of bonds with maturities after 2036 is $497.7 billion, almost a fifth of the total face value of bonds analysed.

Total Fossil Fuel Bonds (USD) Maturing, by Year
Total principal value of fossil fuel bonds maturing in a given year
Source: Urgewald, LSEG

The bonds examined in this project were limited to bond ISINs issued by companies in Urgewald’s Global Oil & Gas Exit List (GOGEL) 2022 and Global Coal Exit List (GCEL) 2022.

8,649 bonds were listed in the GCEL and the GOGEL. We used the Refinitiv Eikon database for information about each bond and holding information. This dataset is incomplete as it does not have full coverage of bondholders for each bond issued.

Data cleaning
The data relating to each bond was incomplete. Any bonds without key information (original amount issued, first announcement date, maturity date) were removed from the dataset, leaving 7,537 bonds.

Currency conversion
In Refinitiv, each bond’s original amount issued was stated in the issuance currency (CAD, GBP, JPY etc.) To standardise bond issuances, the price of each bond was converted into a single currency, USD. To do this, the original issuance value was converted into USD based on the exchange rate on the date of issuance. Exchange rate data was accessed via the Bank of England. Historic bonds issued have not been adjusted for inflation.

Holding information
All financial holding data is derived from the Refinitiv Eikon database. Data last updated 07/03/2023. Depending on the filing dates of firms and investors in different jurisdictions, data disclosures may not derive from the same date but reflect the latest data available in all cases. The headline figures for investor groups were derived by aggregating the par held across firms owned wholly by the top asset managers. For example, bond holdings in the managing firms Aberdeen Asset Investments Limited and Aberdeen Standard Investments (Edinburgh) were included in the total holdings for the investor group abrdn.

Where applicable, a similar aggregation process has been applied to fund level holdings to arrive at the cumulative holdings for the overall financial group level. Individual funds (e.g., iShares High Yield Corporate Bond UCITS ETF) are mapped via the subsidiary company offering the fund (e.g., BlackRock Investment Management UK Ltd.) to the overall parent group (BlackRock).

Once bonds are issued, investors and financial institutions buy and sell them daily on the secondary market. Consequently, the data shown and analysed in our Toxic Bonds Project are a snapshot taken on 27/02/2023. Therefore, the precise figures shown in this piece may not match other projects that analyse bonds issued by fossil fuel companies and who they are held by, though the general trends should hold across reasonable periods of time.