Roundtable – ESG and sovereign debt
ing advice on what they can introduce in their policies or within a bond’s terms to attract more demand. Tapping this green investor base is important for them. We have seen that in some of our EM strate- gies where there is material engagement, you can point to actual policies or projects that are being considered as a result of that. That is just from a single manager or a few managers, so in EM there is an opportunity to have a greater impact. Assuming you have the right assessments and
understanding about what is required, there is a big opportunity there.
Can anyone give me some examples of how investors are partnering with govern- ments to ensure they can continue to access the financial markets in the years to come? Hamlyn: The conversations we have are about making sure the issues important to investors are recognised in how the market is managed and operated. I do not think that more can be done in terms of specific projects, mainly because that is well handled by the green bond issuance side and all the developments taking place there. Setting aside green bonds, you need to take a whole of government approach to engagement. As investors we do not have the expertise to recommend specific pro- jects or assess the viability of certain envi- ronmental schemes that the government might be considering.
The best contribution we can make is not to step in and fill those roles, because we do not have the expertise, but rather to make clear that the availability of funding is greatly improved by the steps govern- ments are taking. Making clear that the door opens wider if governments take these steps is the biggest contribution we can make. Goonetilleke: Pricing is incredibly key at this point. And obviously, if there is a greenium there is a trade-off. It is quite difficult as a value proposition for some- one who does not have a sustainable man-
56 | portfolio institutional | November 2021 | issue 108
ESG risks impact everything from GDP to corruption and geopolitical outcomes, which all affect a government’s ability to repay its debts.
Dr Laura Ryan, Ardea Investment Management
date to invest in a government bond that is more expensive than the government bond that is not.
As Chris highlighted, given that he has a de-risking path in his pension fund, there is going to be a natural progression there, so how do we bring all of that together to ensure that the door is as wide open as possible.
The challenge remains the value proposi- tion and how long that will last for. If you are switching your existing stock of gov- ernment bonds into the green issues, that is costing you money and not all policy- holders would necessarily agree with that.
What impact will the UK’s first green gilt have on institutional investor interest in the green debt market? Grant: It was successful, the orderbook was about £100bn for a £10bn issue which will give other green issuers confidence. The limiting factor could be a lack of sup- ply in terms of the projects sitting in the framework. On the other side, is the pre-
mium investors are paying a saving for the government or is it paying for the framework they have had to build? I am not sure that the premium investors are paying is directly contributing to the green agenda although clearly investment in green bonds is.
Do investors have to pay a premium to hold green debt? Hamlyn: It is a challenge. It comes down to how we interpret the lower yields we might earn on green bonds versus the higher yield on legacy bonds. There are several ways you can look at that. One, it is a lower return, so investors are paying to own green bonds.
Another interpretation is perhaps that those green ones are lower risk in that their future cashflows are linked to green projects. Perhaps there could be a realisa- tion of ESG risk that affects legacy gov- ernment bonds on issue to a larger degree than it effects the pricing of green bonds. Some of the premiums we are talking
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