The green bonds market is a relatively small but fast growing segment of the credit market. Jonathan Boyd has talked to portfolio manager Helena Lindahl at SPP Funds in Sweden about developments ongoing.
SPP Funds, one of the boutique brands of Norwegian financial group Storebrand Asset Management, has offered a strategy investing in green bonds since March 2015 in the Swedish market.
The SPP Grön Obligationsfond (Green Bond fund) has AUM of some SEK3.7bn (€357m) and is managed by Helena Lindahl.
In this context, the ‘green bonds’ encompasses green bonds, sustainable bonds, climate bonds and socially responsible bonds. Additionally, the fund follows SPP Funds’s own internal guidelines on exclusion, which means it does not invest in companies that are deemed to breach international laws and rules, or contravene human rights, workers rights, or engage in corruption, serious climate and environmental damage, or are involved in controversial weapons – landmines, cluster and nuclear weapons, or tobacco, as well as companies with low sustainability ratings.
The market for green bonds overall is growing fast. SPP Funds cites Environmental Finance’s Green Bond Database suggesting the combined value of green bond issues hit $124.5bn in 2017, which was expected to rise further in 2018.
Overall, however, it still remains a relatively small part of credit issuance. SPP Funds cites the International Energy Authority suggesting that the energy sector will require investments of up to $50trn through 2035, as compared to total green bond issuance currently of somewhere around $300bn. From the point of view of SPP Funds, this is an indicator of a gap between what is happening versus what needs to be achieved, particularly in light of developments such as the recent Intergovernmental Panel on Climate Change (IPCC) report (www.ipcc.ch/report/sr15) published in October 2018, warning of the
dangers should global warming rise above the 1.5ºC target.
“The IPCC report really demonstrate the need for rapid change in scalable sustainable solutions and green bonds are by far the strongest financial instruments in creating fast and long term change,” says Helena Lindahl.
“In a short space of time I would say green bonds have become the most important keys in achieving the global goals and help curb/halt climate change.”
Lindahl continues: “They are not a ‘silver bullet’ to fix climate problems – the asset class is too small to have the needed impact – but that said, green bonds have served as an excellent tool for the finance industry to in a broad way ask questions of how the assets under management affect climate change, and how assets and investing can have an impact on climate change getting any worse.”
“Green bonds have provided a transparency pretty much unheard of before they were introduced some 10 years ago. That’s also an eye-opener for the finance industry as a whole: that it is possible to get a lot more transparency out of investments than previous assumed.
“Looking back, it is very difficult to understand how the whole industry could be satisfied with the lack of general corporate purpose and transparency. Now Pandora’s box is open, the transparency is out there, and So far, the majority of capital raised through green bond issuance has gone to property, Lindahl notes.
So far, the majority of capital raised through green bond issuance has gone to property, Lindahl notes.
“These are both new properties, but also existing properties where it is possible to reduce energy consumption through relatively simple technical means.
”When corporates do that, they reduce the cost of energy, and hence improve the economics surrounding real estate.
“Renewable energy is another important sector, where capital primarily goes to projects such as solar cell parks and wind farms.
“Fortum’s new biogas plant is an example funded with a green bond. Internationally, more and more projects in the transportation sector are being financed by green bonds, but also the rebuilding and upgrading of cities.”
”In terms of other areas, its harder to asses the cashflow impact. For example, all the water pipes built 60-70 years ago across Europe need replacing in a faster process than currenty done – just think of the recent fatberg in London clogging up the system!
”But water systems need to be aligned with the climate system; awareness of this is kicking off all across Europe. In the coming 10-15 years, this will be a key area.”
In Europe, there is a tendency for corporates to want to issue longer dated maturities, Lindahl notes.
One reason is the lifespan of projects. However, the yield curve looks attractive at the long end, as long as the stimulus continues from the European Central Bank. However, Lindahl suggests that she prefers shorter lifespans in her investments.
Even if buying green bonds, the credit quality still depends on the issuer of the bond, and that can and will change over time. Thus, her preference is around five years rather than 15 years plus.
On that horizon, as an investor she can be paid on shorter credit and does not take on the same amount of credit risk associated with investing over the longer term.
|SPP Grön Obligationsfond A||4||1||1|
|Nordea Bostadsobligationsfond icke-utd||6||4||2||1|
|Swedbank Robur Räntefond Flexibel||3||5||3||5||4|
|Swedbank Robur Räntefond Kort Plus||9||9||4||3||1|
|SEB Obligationsfond Flexibel SEK||7||7||5||2||2|
|Ålandsbanken Kort Ränta SEK||5||6||6|
|Handelsbanken Ins Kortränt Crit A2 SEK||1||3|
|Öhman Grön Obligationsfond A||2||2|
|SEB Obligationsfond Flexibel C SEK – Lux||8||8||4||3|
|3-year ranking versus peers|
|Source:Fondkollen.se, data to 31 October 2018|
For any investor in green bonds there is still asymmetry between the bid and offer sides. Lindahl is looking forward to more issues of green bonds, and corporates finding investments that are eligible to issue such bonds against.
“That will sort itself out over time, but the situation now is that all the world’s asset managers are on their feet hunting this asset class,” she says.
”I think we would have to issue a remarkable volume of bonds to meet that demand. But the market has been quite good about keeping pricing in line with other bonds. There’s a consensus in the market to not kill the asset class by pushing the yield too far away from other bonds.
”We need to treat this instrument like any other, and cannot risk managing it differently,” Lindahl continues.
“I think the same thing will happen in green bonds that, for example, that everybody wants to buy at the same time or sell at the same time.
“But I think if we have a severe selloff in the bond market, maybe green bonds can perform better in such a market, but its too early, and we haven’t had a selloff in the bond market since the inception of this instrument – dots in time, but not a huge selloff.
“Maybe we should ask ourselves and evaluate the instrument after that, rather than guessing beforehand.”
Any collective investment in instruments on the basis of ESG factors faces questions over how to compare it with other investments in a standardised manner.
“If you look at this market, everybody is looking for standardisation,” Lindahl notes.
“But even though we will have standardisation, we have to have asset managers with knowledge to evaluate investments themselves.
“They cannot just lean on standardisation itself. You have to understand what the underlying asset is and how green it is. If you are an asset manager you have to be able to answer that question and not just rely on standardisation.
Concluding, Lindahl says: “Recent attempts to standardise this market are good and will make our lives a lot easier, because we can compare the greenness of different issuers of green bonds in a way that we have not been able to do previously. And if we get standardisation, issuers will find it easier to issue green bonds.”
“We have had a situation where each issuer has created its own impact reporting, for example, and there has been winging and whining about that. Standardisation means we don’t have to reinvent the wheel over and over again.”
Green bonds and Eurosif
On the 26th of November, in Brussels, Eurosif will launch the 8th edition of the SRI Study, the European landmark for sustainable and responsible Investments.
The results of the 2018 SRI Study reflect the evolution in the sustainable finance industry over the past two years, while giving a sense of direction on what is coming next. This is a great opportunity to find out and discuss with the key influencers who have shaped the main events of the past two years, to understand better the impacts of regulatory changes and the extent to which they have been able to spur growth across European member states.
Click here to see the full agenda: http://www.eurosif.org/wp-content/uploads/2018/10/Eurosif-2018-SRI-STUDY-agenda.pdf