Feature | ESG
sectors active in this market. Although more than 40 countries have green bond as part of their debt pile, issuance is dominated by a small group, including China, France and the US.
This lack of diversity is why Candriam is yet to establish a pure green bond fund. “We want to tap issuers who are not issuing green bonds,” Czupryna says. For pharmaceuticals, media companies or telecommunication groups issuing green bonds is not straight forward.
This is not the only reason. Czupryna points to a need for standards to improve
lower return just because it is a green bond. “Overtime, green bonds will probably trade at a slightly tighter spread,” he says. “This is probably due to there not being many green-labelled bonds around, so there is a scarcity value.” So in a risk-off scenario such debt should perform better than mainstream bonds because there will perhaps not be as many sellers. Jan Willem de Moor, a senior credit portfo- lio manager at Candriam, says that green bonds benefit in the secondary market from growing investor interest. “This
They are part of it, for sure, but the green
bond market is not diversified enough yet to be the base for a global fixed income portfolio. David Czupryna, Candriam
before they embrace the market, but he concedes that things look bright in this area. “The market is there. It is moving in the right direction,” Czupryna says.
VALUE FOR MONEY? Concerns with green bonds go beyond if they are green enough. Green bonds are not necessarily more legally secure and are not more senior in the capital structure as a conventional bond issued by the same com- pany, but you are taking the same risks. Along with that they are trading at tighter levels to their comparative bonds. “You are paying a green premium for them,” Rud- gard says.
Indeed, telecommunications giant Verizon paid 3.9% for the $1bn (£812.3bn) green bond it issued earlier this year. This was slightly lower than the yields offered on its conventional debt, a result of high demand and not enough supply for sustainable debt products. Freedman adds that no matter what project a green bond is funding, there needs to be a strong financial case when deciding to invest. “We are managing our clients’ capi- tal and we are not mandated to accept a
means that green bonds often perform well after new issuance. That also implies that after a while green bonds can become expensive, which can be a reason for us to sell again.”
When it comes to the cost companies are paying to borrow in this space, Freedman believes that lower yields may not be good news for investors, but they could help gen- erate a much needed increase in supply. “The good actors in this space, the compa- nies that are making the positive transi- tions that benefit society and the environ- ment, should be rewarded with a lower cost of capital,” Freedman says.
IT’S GOOD TO TALK
Engagement is a big part of sustainable investing in equities. Now that the strategy is moving to other areas, including debt, it has been difficult to have any influence over management in the same say that an investor with a sizeable shareholding would have. Yet all is not lost.
Smaller private companies that rely on debt to fund their ambitions are more likely to listen because they need the money. “Green bonds open the door for engage-
38 | portfolio institutional | October 2019 | issue 87
ment in the fixed income market,” Gordillo says. “If 10 years ago I said I was going to do engagement with a sovereign bond issuer I would have been laughed at.” The need to meet climate change targets that they set themselves and by the Paris Accord mean that they prove their he adds, pointing out that governments want to dis- cuss how to understand the areas where they could make an impact. “Green bonds have allowed us to engage with fixed income issuers who were not part of our engagement radar,” Gordillo says.
He uses the example of Italian energy company Enel. It has agreed to pay its lenders more if the company missed certain renewable energy target. This was the result of senior man- agement
working
investors. EARLY DAYS
For Felipe it is important to see that the market continues to develop and improve that could lead to higher quality bonds being issued and better reporting, which he says is essential. Rudgard adds that she does not believe the growing popularity declining. “If it is not green bonds it will probably move on to some of the other green financing options. “You will see a branching out in terms of people looking at the proceeds of compa- nies and not just thinking about it whether it is a green bond or not but thinking about it from an ESG perspective.” So sustainable debt has clouds of contro- versy hanging over it and concerns that investors are not being adequality rewarded for the risk they are taking. Yet steps are being taken by regulators and government bodies to bring clarity in the hope of increasing supply. Afterall, most projects that will give us cleaner energy sources, purer water and give access to healthcare and education are funded by debt. The mar- ket is in its infancy, but it appears that, in some form or another, it will be helping to fight climate change and improve communities.
with
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