Feature


eigns with corporates spread across a few sectors. Although more than 40 countries have green bonds as part of their debt pile, issu- ance 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. This is not the only reason. Czupryna points to a need for standards to improve 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,” he says.


VALUE FOR MONEY? Concerns with green bonds go beyond if they are green enough. Such products are not necessarily more legally secure and are not more senior in the capital structure as a conventional bond issued by the same company, so 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,” Rudgard says. Indeed, telecommunications giant Verizon paid 3.9% for the $1bn (£812.3bn) green bond it issued early last year. This was slightly lower than the yields offered for the company’s 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 fund- ing, there needs to be a strong financial case when deciding to invest. “We are managing our clients’ capital and are not mandated to accept a 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 may not be as many sellers. Jan Willem de Moor, a senior credit portfolio manager at Robeco,


says that green bonds benefit from growing investor interest in the secondary market, meaning that they often perform well post issu- ance. “That also implies that after a while green bonds can become expensive, which can be a reason for us to sell again,” he adds. When it comes to cost, companies are paying to borrow in this space, but Freedman believes that while lower yields may not be good news for investors, they could help generate a much needed increase in supply.


“The good actors in this space, the companies that are making the positive transitions that benefit society and the environment, should be rewarded with a lower cost of capital,” Freedman says.


IT’S GOOD TO TALK


Engagement is a big part of a sustainable investing equity strategy. This is now moving to other areas, including debt. It has been dif- ficult to influence management in the same way that an investor with a sizeable shareholding would have, but 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. “If 10 years ago I said I was going to do engagement with a sovereign bond issuer I would have been laughed at,” Gordillo says.


The need to meet climate change targets, set by governments and the Paris Accord, mean that sovereigns want to identify 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. Its board has agreed to pay its lenders more if the company misses certain renewable energy targets. This policy was the result of senior man- agement working with investors.


Green bonds have allowed us to engage with fixed income issuers who were not part of our engagement radar. Felipe Gordillo, BNP Paribas Asset Management


EARLY DAYS For Felipe it is important to see the market develop and improve to entice higher quality bonds to be issued with better reporting, which he says is essential. Rudgard adds that she does not believe the growing popularity is declining. “If it is not green bonds it will probably move on to some of the other green financing options. You will see a branch- ing out in terms of people looking at the proceeds of companies 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 controversy hanging over it and there are concerns that investors are not being adequality rewarded for the risk they are taking. Yet steps are being taken by regulators to bring clarity in the hope of increasing supply. Afterall, most pro- jects that will give us cleaner energy sources, purer water or access to healthcare and education are funded by debt. The market is in its infancy, but it appears that, in one form or another, it will be helping to fight climate change and improve communities.


February 2020 portfolio institutional roundtable: ESG and fixed income 25


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