Henrietta, at a roundtable we hosted last year you said that despite building sustainable portfolios you do not invest in green bonds. Has that changed? Henrietta Gourlay: No. I need more reassurance that the money we invest will be used properly.
My biggest concern is that while green bonds are ringfenced for certain projects, if an issuer gets into financial trouble the proceeds could be used to pay a debt.
Investment banks should get more involved by implementing stronger controls, while the rating agencies could take more of a stance. For example, a bond losing its sustainable rating should impact the issuer’s rating. You need proper buy in for that, but it isn’t there. That’s why I’m cynical. Rhys Petheram: Henrietta is right to be cynical. The frameworks used in the green bond market are loose. There is no definition of what is green and only 20% of green bonds are certified. To get comfortable with investing in green bonds there has to be a verification process alongside an assessment of the issuer. It is all about the issuer’s journey. The green bond connects the dots between where they are and where they want to get to.
So, this is how you avoid greenwashing? Petheram: A big chunk of our universe is weeded out. Some sec- tors are more guilty than others, such as property, which is challenging. Nicolas Forest: Sustainable bond issuance reached $1trn (£816bn) in 2021. If we continue like that, the market will be worth $5trn (£4.1trn) by 2025. Then there is the Sustainable Finance Disclosure Regulation (SFDR). A year after it was implemented, €4trn (£3.4trn) of capital in Europe follows articles 8¹ and 9². We have to invest in green bonds, but it is a huge market, which makes it difficult to identify the best ones. So, there is value in an ESG analysis of the issuer and a good use-of-pro- ceeds analysis. This is not just about following the Green Bond Principles, but to check if the bond is consistent with what the issuer says as well as to monitor the reporting and the KPIs. This is the beginning of a decade of expected higher green and social bond issuance. Rating agencies are not enough. A good active fund manager is needed to select the best green bonds. Katie Yu: A key lever you can pull to relieve this anxiety is to tell the issuer how you want their company to change and agree the ESG or climate KPIs before they come to market. Gourlay: That should come from the syndicated banks. Individ- ual bond investors, even institutional investors, do not have any power. It needs to come from the top.
On the use of proceeds point, it just takes one sentence – “… and general corporate purposes” – for an issuer to use it for something else.
8 June 2022 portfolio institutional roundtable: Sustainable debt The first pillar of green bond
analysis is issuer analysis. Nicolas Forest, Candriam
Christoforos Bikos: We have spent a lot of time with asset man- agers discussing SFDR and Article 8. My perception is that application of this regulation depends heavily on the compli- ance department.
It is a tick box exercise rendering the Article 8 – and any SFDR classification – useless for the vast majority of Article 8-compli- ant funds.
The green bond market is oversubscribed, so you are buying green bonds for a higher price than a standard bond from the same issuer. Why would I pay $110 for a green bond when I could pay $100 for a standard with identical characteristics – maturity, duration, coupon – from the same issuer especially if with the green bond credentials point to an issuer that moves towards the right direction?
The majority of SFDR-compliant funds are forced buyers of
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