could be larger than for a big corporate. We need to focus on what KPIs are put in deals and, depending on the size of the company, we could suggest a higher step up. That depends on the engagement process before it comes to market. Forest: It also depends on market conditions. It was 25bps when the bund yield was -0.20. Petheram: It should be 500bps. You see that in hybrids when you want to massively incentivise something to happen, so 25bps is not right. The way it works is that they pay us when they miss their ESG targets, so the whole mechanism should change.


Will inflation impact sustainable debt portfolios? Loughney: Not at the moment. Unless inflation is out of control and a government is downgraded and what we have spoken about falls off their agenda, but it is not having any influence at the moment. Emmons: Generally, inflation is bad for real returns, but not any more so in the green space than conventional bond markets. Interestingly, to date there is no inflation-linked green bond market, but we understand that France has been mulling its first inflation-linked green bond, so that might be a catalyst for that market to open up. Gourlay: Floating-rate green bonds have built in inflation protection. Forest: The yield to maturity of a sustainable bond benchmark is close to 1.7%, so 1% higher than six months ago. Petheram: You have made a subtle but important point: there is no difference between green bonds and the conventional market.


Our fund was hit the same as other global credit funds when Russia invaded Ukraine. As long as I have the breadth of opportunity to invest in, then my performance should be judged alongside global credit funds. That is different to equi- ties, where the tracking error risk or active risk of a green equity fund versus the broad global market is dominated by idiosyncratic stock-specific and sector risk that you do not get in the credit markets. Emmons: You have raised an interesting point about the greenium, which we mentioned earlier. It might be modest in some areas and significant in others, especially at certain points in the cycle. The situation in Ukraine is forcing up energy prices, which could induce more focus on renewable issuance, and so the wider consequences of this conflict could have a compressing effect on the greenium over the longer term. Petheram: It is the opposite in the long term. In the short term, inflation and its relationship to financial conditions could cause a squeeze as we move through this year. While market share might go higher, issuance in the corporate bond market is going to be lower than last year, but at the same time we have


20 June 2022 portfolio institutional roundtable: Sustainable debt


these box-ticking funds trying to buy green bonds, so it could be an interesting year. Bikos: The impact of inflation on green and traditional bonds is identical. The influence inflation is having on sustainability is that big infrastructure projects especially the renewable infra- structure ones are stalling because the prices of raw materials that were let’s say $100 are now $170. This is the key problem we may face in terms of the transition. Forest: The average duration of green bonds is longer because we have to finance long-term projects. We have more inflation, but “greenflation” – inflation coming from the transition – is the real risk. Yu: More than 50% of headline inflation comes from energy prices. This is due to a lack of renewable capacity while capex from fossil fuels is delayed as no one wants to look at that any- more. At the same time carbon prices are going up. We are in a long-term energy inflation trap. We need to focus on compa- nies which have weak climate transition strategies, or coun- tries like the US and China where the carbon tax regimes are not well reflected and will be heavily hit in the medium to longer term.


To make a real impact on the economy, we want to invest in climate solutions rather than


divest from brown companies. Katie Yu, Phoenix Group


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