Feature ESG – Bonds
issue a green gilt prove to be the catalyst that sparks further growth and brings new issuers to the market? Gordillo points to the example set in Europe, which saw its first green sovereign bond issued by Poland in 2016. “That created dynamism. That helped to create a green yield curve, which is a reference point for future transactions.”
This last point regarding a green gilt is important for the devel- opment of the market. “We believe it could help support pric- ing by establishing a green curve that corporate green bond issuers can reference,” Nietsch says.
One market watcher believes that the UK could have work to do if it wants to grow its corporate green bond market. “In other European markets, sovereign green issuance can be a catalyst for more corporate green debt,” Lawrence says. “In the following 12 months, there is a higher volume of issuance, a greater diversification of issuers and more first-time issuers. “However, we need to acknowledge that the EU has moved faster in terms of the regulatory framework around climate and green bonds. The UK is slightly behind on its journey,” he adds. His colleague believes that there are other positive factors at play. “Irrespective of whether the UK government issues a green gilt or not, this market is growing,” King says. “It is being pushed by investment banks. It is the shiny new toy to showcase to corporates and is a good way for those corporates to simply explain to the market how they are making their port- folios sustainable.” Freedman points to the impact green sovereign-debt issuances in Europe have had as a source of optimism that the proposed green gilt could be a catalyst for wider corporate issuance in the UK. “The reporting framework is as important for the impact that the use of proceeds brings, because that encourages the private sector to follow suit,” Freedman says.
Setting a standard To encourage further growth in the green debt space, the EU has introduced a system, a taxonomy, to define what a sustain- able asset is.
“The regulatory landscape is evolving fast,” Guignard says. “Anything that helps define standards is welcomed by asset managers and investors.
“There is a diversity of local labels or regulations and it is diffi- cult to find a consensus between them,” he adds. “The EU’s initiative is creating standards and will help the consensus on ESG matters.”
The initiative has been welcomed in Europe. “It is an impor- tant evolution,” Reznick says. “The enhanced reporting requirements and demands on labelling will be positive in identifying the greenwashers. It will also create barriers of entry, so companies will have to strengthen their sustainability credentials to access capital.
40 | portfolio institutional | May 2021 | issue 103
“Having more information makes it easier for us to assess, engage and track,” he adds. The EU’s taxonomy will give clarity on what a green asset or project is. For Gordillo, this is a bene- fit, but he questions how the taxonomy will be used? “We are seeing efforts from corporates which are starting to report their revenues and capex using the taxonomy. Next year there will be an obligation to report on the taxonomy. Informa- tion availability is crucial. The taxonomy will allow different market players, including central banks, to push for and sup- port more green assets.” he adds.
The taxonomy will help develop the market as access to infor- mation has been described as “patchy” by some. “It is interesting how ESG has gone from being a “wouldn’t it be nice to make the world a better place” approach to being data driven. That trend is accelerating,” King says. “Our clients and regulators are not only asking for proof of how we assess companies, but also the engagement we do and how our portfolios look at an aggregate level. This is data-in- tensive work. We do a huge amount of quantitative analysis to support that and it is only going to grow.” However, it is not perfect. “It could fuel growth in the bond market, but the taxonomy is a narrow set of criteria, so a lot of capital will be chasing a small group of issuers, which could mean that some areas of the market overheat,” Freedman says. “This goes against the bigger picture of what we are trying to do, but as the taxonomy is refined to whether oil and gas be excluded, it will encourage growth in certain areas. There will be more taxonomy-aligned issuance in time,” he adds.
More to come
Despite these concerns, the future looks bright. “In green bonds, I expect more supply and a broadening of sectors,” Freedman says.
The oil and gas sector will see a major company issue its first sustainability-linked bond this year, Freedman adds, which would be a significant moment, given the industry’s role in damaging the climate. For Reznick, focusing on his two objectives when building a bond portfolio is crucial. “At the end of the day we are fixed income investors trying to deliver into two investment objec- tives: a financial return and a return to the environment and society. We cannot lose sight of one or the other to deliver on those objectives,” he says. Gordillo is also optimistic. “The thematic bond market it is about 1% of the global debt market, so there is room to grow. “Thematic bonds have succeeded in introducing the sustaina- bility agenda to actors that never look at it – regulators and central banks. This is something that could change how the market works. “These are exciting times in fixed income,” he adds.
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