Evans: What does not seem to be particularly well understood is that if a scheme does not have contribution income and its assets fall sharply, it takes a long time to recover.
Will the supply of sustainable debt increase this year? Reedie: There is a supply/demand imbalance in green bonds. It makes us nervous because we have seen this movie before. When demand for a product outstrips supply, the capital mar- kets system has a shocking record of creating the vehicles to fuel demand, such as LBOs in the late 90s and CDOs in the mid-00s. This is too important an issue to fall foul of the same mistakes. I am nervous around this. That is a public market perspective. My guess is that there will be a healthy interaction with private capital in these areas. There are too many people jumping on the bandwagon and buying green bonds because they are green. There are not enough questions being asked around why they are green and
how you are holding the issuer accountable to whatever com- mitment they have made.
These bonds are being structured for the issuer to take advan- tage of a lower cost of funding because demand outstrips sup- ply. So, the providers of capital should have more say in what is a fair and measurable commitment to net zero for the company. We are not, which is a concern. Freedman: Part of it is greenwashing. It is from investors who want to show potential clients how great they are by owning a portfolio of green bonds. It is also companies who want the ‘halo effect’ and cheaper funding. For us, it is about fundamental analysis on a case-by-case basis. A company might have a fantastic green project, but it might be terrible at looking after its employees. So, taking a holistic perspective is important. Clissold: The asset management industry is culpable here. I receive a lot of unsolicited emails suggesting that this is the corporate bond fund I need because it is green. It has reached the point where they do not say what the return is likely to be. It does not matter about the return because we are investing in green bonds. Freedman: From a regulatory perspective, that is the next stage. This is going to come under more scrutiny. Nash: But the article angles are so gentle that it became main- stream to have an Article 8 fund. The guys who are doing sus- tainable investing seriously leapt to Article 9, so there was a tonne of money going that way. The demand is huge. Freedman: Some clients do not consider Article 6 anymore for that reason. Nash: This has been caused by the rules for Article 8 being made too gentle and you may get an overvaluation in some of these assets. Freedman: A portfolio of green bonds today is mostly in European investment grade, utilities and banks, making it exposed to bund yields rising. There are unexpected risks a cli- ent might not realise they are carrying.
We have been wanting inflation for so long, but when we get it
everyone panics. Mark Nash, Jupiter Asset Management
In 10 years, we may not need labels. It will be differences in the cost of capital and the quality of the transition journey inves- tors look at. We are where we are because of regulation, but we should have to justify why each holding is a good transition story or ESG credit.
Are asset owners under pressure from their stakeholders to buy green? Clissold: Yes, but we are not under pressure to buy bonds because they are green. There is an acceptance, that given our size, we are better off interacting with companies rather than taking a secondary route via a constructed green bond index which forces us down certain routes. We are fortunate to have a large private markets group which
April 2022 portfolio institutional roundtable: Fixed Income 17
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