Union Investment launched its first fund for green bonds. Money invested in green bonds has to be used to finance environmental projects. UniInstitutional green bonds for institutional investors invests mainly in green bonds from international issuers. The fund also contains bonds from companies whose business activities are compatible with the UN’s sustainable development goals (including environmental protection and social projects). This increases the portfolio’s diversification.
Securities are selected for UniInstitutional green bonds on the basis of fundamental credit analysis combined with an analysis of the issuers’ sustainability. The use of sustainability filters, which are also applied to Union Investment’s sustainability funds, ensures that paper from issuers that breach human rights or generate nuclear energy, for example, is excluded from the outset, including the green bonds of such companies.
When UniInstitutional green bonds was launched, the proportion of green bonds in the overall portfolio was just under 70% (minimum proportion: 51%). This is to be increased to between 90 and 100% in the next few years. Corporates currently form the largest group of issuers in the fund, followed by state backed issuers such as development banks. The country allocation is dominated by France, Germany and the Netherlands. High yield bonds are permitted to make up a maximum of 10% of the portfolio; currency risk is hedged. Across all funds, Union Investment has already invested €1bn in the green bond asset class.
Green bonds provide transparency for investors regarding how their money is used, with records kept until the bond matures. The projects that are financed have a direct benefit for the environment, such as wind or solar farms. An established standard, the green bond principles of the International Capital Market Association – of which Union Investment is a member – plays an important part in creating transparency. The invested capital has to be managed separately from the issuer’s capital.
This young bond segment is likely to benefit from political developments, such as the pledge made at the global climate change conference in Paris to mobilise $100bn per year by 2020 to support developing countries in tackling climate change and to finance measures to protect the climate. Increasing environmental and sustainability regulations are another positive factor for this market segment. While the volume of green bonds issued in 2016 was around $90bn, the volume is expected to rise to $ 150bn this year according to estimates.
“The fund offers an attractive risk/return profile for institutional investors. As green bond investors usually have a longer-term investment horizon, we anticipate lower volatility than with classic corporate bond investments and, at the same time, similar upside potential. What’s more, the fund is an opportunity for investors to specifically support environmental and infrastructure projects,” said portfolio manager Michael Kobel.