23 March 2017
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Following the Polish issue of a €750m green bond in December 2016 with a 2021 maturity, the French Treasury has followed suit by issuing a €7bn 2029 sovereign green bond (OAT).
With total bids attracted of more than €23bn, the bond yield was fixed at 1.741%.
Asset managers accounted for some 33% of the 200 investors backing the issue, followed by banks (21%), pension funds (20%) and insurers (19%). Official institutions and hedge funds represented 4% and 3% of the bond buyers respectively.
France’s green OAT will serve particularly to fund expenditure under the “Invest for the Future” programme to fight climate change, adapt to climate change, protect biodiversity and fight pollution.
The French government will publish two annual reports on the use of proceeds and on the performance of eligible green expenditure (“output report”).
It will also report on the ex-post environmental impact of eligible green expenditure.
Over €10bn in total eligible green expenditure has been identified for support by Agence France Trésor (AFT) the French debt management agency, for its programme of issuance in 2017.
French investors have been allocated the largest share of the issuance (37%). Local public pension fund Ircantec managed by Caisse des Dépôts (CDC) has subscribed for €22.3m of the first French sovereign green bond.
Ircantec’s green bond portfolio amounted to some €330m, or 3.4% of its entire portfolio as of December 2016.
The institution launched a request for proposals in October 2016, in order to select a manager specialised
in green bonds to actively manage its exposure to the asset class.
The search is due to last until mid-2017. Another public pension fund, Erafp, which manages the French public service additional pension scheme, has invested some €40m in the bond.
Dutch pension funds have been very active as well – 19% of all investors – with APG investing €600m while PGGM and MN investments have amounted to €330m and €37m respectively.
EXPECTATIONS
Natixis’ SRI boutique Mirova has invested respectively €27.6m and €13.5m in the French and Polish green government bonds.
According to Christopher Wigley, head of Green Bonds at Mirova, their issuances form the first visible sign of governments trying to meet their commitments made at the Paris COP21 conference in December 2015
– when binding limits on carbon emissions were agreed to globally.
“We think green bonds are good vehicles to fund for example, green infrastructure.
“In fact, unlike equities, green bonds can do the very heavy lifting by raising large amounts of money, for example, €7bn at a time, in the case of France,” he says.
Mirova’s head of Fixed Income Marc Briand adds the French green bond is “quite rigorous and shows the amount of effort put into constructing this bond.”
“Six sectors are eligible for financing: built environment, transport, energy, resources, adaptation and pollution. They have conscientiously excluded controversial activities such as nuclear and clean fossil
fuels.”
Wigley says Mirova may also invest in other green government bonds on a case-by-case basis.
“It has been written that Sweden, Austria and Japan are considering issuing green bonds. Additionally,
it may be said that climate change is acute in many developing countries. Should emerging countries like
Malaysia or Thailand consider issuing green bonds, then investors may find their issues attractive for their investment grade ratings, yield and real impact on the local environment,” argues Wigley.
Dutch boutique Actiam has acquired €50m of the recently issued French green bond. Focused on specific ESG themes, the firm sees climate, water and land as potential alpha drivers.
“We believe we have a responsibility towards society which we take very seriously. We use all our instruments, like active ownership, exclusion and ESG integration, to achieve our goals. Green bonds form an integral part of this investment philosophy.
“For this particular green bond, we were very pleased with the intention of the French government to set a new standard for reporting on impact. We think this is an important new step that we embrace fully,” highlights Carl Haarnack, fixed income portfolio manager at Actiam.
He expects the green bond market – govies and corporates – to expand in coming years not only in volume but also in the diversity of players.
STANDARDS ALIGNMENT
Actiam also expects a growing alignment with international standards, such as the Sustainable Development Goals and the Paris agreement on climate change.
Like Mirova, the Dutch manager will consider investments in other green government bonds.
“But we are critical and will only buy those green bonds that pass the criteria set by our ESG analysts. We don’t buy green bonds simply because they have been labelled green.
“To help developing a meaningful and credible green bond market, that will last into the next decades,we
need to be critical in what we regard as truly green. We think that part of the success is a combination of showing/reporting what the impact will be and a yield that is comparable to its non-green peer,” explains Haarnack.
A WAVE OF GREEN BOND FUNDS TO COME?
From a fund buyer perspective, Edmond Schaff, head of SRI Fund Selection at Cedrus Asset Management, assesses the French issuance is a clear success and that as a result, France sits once more amongst pioneer countries regarding climate related initiatives in finance.
“Moody’s estimates six other countries including China and Sweden could quickly follow France. The momentum of green govies’ issuances seems to be taking shape.
“In addition, this issuance is in line with France’s policy regarding the fight against climate change with the implementation of a selection process of eligible expenditure, reporting over fund allocation, outputs and their environmental impact.”
Schaff adds that green bonds enable investors to achieve bond investments with a significant environmental
impact.
“Green bonds enlarge investments that were previously limited to infrastructure financing or microfinance.
This asset class enables issuers to access new financing sources and investors to broaden their SRI approach in the fixed income space.
“Also, investors who have to comply with the French law on energy transition – article 173 of the law obliges French institutional investors to disclose their carbon footprint – could communicate on this type of investment,” he says, adding that an expected wave of green bond fund launches has been noted by Cedrus’ research, which points to 12 strategies on the asset class.
“Our research shows that Mirova, Humanis Gestion d’Actifs and SEB AM have the largest AUM in green bonds. In addition, Lombard Odier IM has partnered with Affirmative Investment Management for the launch of a fund focused on climate bonds.
“Affirmative IM is run by former employees of the World Bank and Nikko AM which was the first manager to ever launch a green bond fund. There will be other strategies launched over coming years,” comments
Cedrus’ SRI fund selection chief.
Schaff adds that the firm does not invest directly in green bonds funds currently, as Cedrus’ SRI fixed income strategy focuses on corporate securities, whereas these funds invest in bonds issued by governments, supranational agencies and corporates.
“However, we hold positions in SRI credit funds that have themselves significant investments in green bonds,” says Schaff.
This feature has been first published in the March issue of InvestmentEurope.
