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ods. “People separate equities and fixed income into different approaches, but in a lot of cases you are looking at the same companies,” says Madeleine King, who is head of research and engagement at Legal & General Investment Management. “So, as much as each asset class has its idiosyncrasies, there are a lot of commonalities.” King’s colleague Jonathan Lawrence, who is a responsible investment analyst, adds that the issuer is just as important as the bond. “Irrespective of a bond’s label, investors are exposed to the balance sheet and cashflows of the issuer. Therefore, you are exposed to the same risks as when buying a normal bond. “When we construct a portfolio, it is important to invest in companies which are taking sustainability seriously, even when participating in the vanilla bonds of a good ESG company as opposed to buying green bonds of a weaker ESG company,” he says.


This is a big issue when assessing the sustainability of a bond. “Not all bonds labelled green are deserving of the label,” says Eric Nietsch, head of ESG Asia at Manulife Investment Man- agement, who explains that they have decided not to invest in some green bonds due to concerns relating to the company’s framework. “You have to assess what an issuer is doing overall. Although you can get some comfort around a project that a green bond is funding, you have to be careful that other parts of the balance sheet are not being used to expand its overall emissions,” he adds. Reznick agrees that bonds should be assessed at the corporate level, not just the project it is funding. “The labelling is impor- tant from a communications point of view, but it is about the companies you invest in that shows how the portfolio is indem- nifying itself against the risk of climate change. “Green bonds are necessary but not sufficient – you need change at the corporate level, which has an impact on all secu- rities in the cap structure, not just project based,” he adds.


Is it worth it?


It is an issue as old as the concept of sustainable investing and people are still talking about it: does buying green mean mak- ing less money? “There is always the question of who gets paid for being green – the investor or the company?” Nietsch asks. “It is becoming reasonably established that there is a premium for issuing green bonds in that they tend to price a little tighter than non-green issuances.


“That does not necessarily mean lower returns,” he adds. “We believe green debt can help companies become more resilient and we have not seen many green bond defaults. This debt can contribute to de-risking a company, so it can provide an attrac- tive risk-return profile, which, we believe, could enhance returns over the long term.”


28 June 2022 portfolio institutional roundtable: Sustainable debt


When it comes to green bonds, Freedman sees a slight spread premium, or a ‘greenium’, to vanilla bonds, making it clear that he is talking low single digits.


“Labelled bonds are stickier capital,” he says. “There are less sellers during times of crisis, so they hold in better during less favourable periods for fixed-income markets.” The greenium can be a little more pronounced in some of the brown industries, Reznick says. “There is greater demand here because if you are building a diversified sustainable portfolio, it is difficult to include the brown industries, which have an element of cyclicality in them. But if a brown industry company issues a green bond, you obtain the diversification and sustain- ability benefit from the debt. “As a result, they can be overbought because no one wants to sell them,” Reznick adds. Ultimately, when it comes to the return, it is equal to the risk taken. “A good ESG company is a company with lower risk,” King says. “Risk and reward are linked in bond markets, and so strong ESG companies tend to trade tighter than problematic names.”


It’s good to talk Creditors do not get a vote at AGMs, so the influence they have over a corporate may not be as strong as it is for shareholders. But where bondholders could be effective is by refusing to lend money to corporates, especially as they typically make several visits to the bond markets. “We can influence the cost of capi- tal,” Freedman says.


“In terms of who has more power – the lenders or the issuers – it ebbs and flows depending on the conditions in financial markets,” he adds.


Risk and reward are linked in bond markets, and so strong ESG companies tend to trade tighter than problematic


names. Madeleine King, Legal & General Investment Management


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