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Impact Investing Forum

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London. Nov 18-19. (Virtual)

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Impact Investing Conference

Squeeze on ‘greenium’ as ESG bond investors demand more value  Financial TimesSqueeze on ‘greenium’ as ESG bond investors demand more value  Financial TimesSqueeze on ‘greenium’ as ESG bond investors demand more value  Financial Times

Impact Investing Conference

Investors have always been willing to pay a premium to secure green bonds. This is to reward companies and governments that are trying to improve their credit ratings. But there are signs that this so called “greenium” is beginning to disappear. Moody’s estimates that $450bn worth of green bonds will be issued globally in 2021, an increase of around $300bn from last year. This will help alleviate the scarcity of green debt that was so highly prized by the fund management industry. Moody’s expects $450bn of green bonds to be issued worldwide in 2021, up from around $300bn last year.

We are not interested to buy a bond for the label. . . Our clients are not required to accept lower returns.

Scott Freedman, Newton Investment Management

Fund managers believe that companies and governments should be rewarded or penalised based on their green efforts. They shouldn’t just rebadge the debt to pay it off. Madeleine King, cohead of global credit research at Legal & General Investment Management, says that a green bond is not worth more than a normal bond from the same company. However, the creditworthiness and sustainability credentials of the issuer are identical in both cases. It makes no sense to pay more for a green bond than a normal bond issued by the same company, if the creditworthiness and sustainability credentials of the issuer are equal in both cases. There are also signs that other investors are beginning to think along similar lines. According to bankers who worked on the deal, the UK’s debut green gilt was priced at 2.5 basis points below the equivalent conventional gilt. This saved the Treasury PS28m over the 12-year term of the PS10bn bond. According to bankers involved in the deal, the UK’s first green gilt was priced at 2.5 basis points less than the equivalent conventional gilt. This saved the Treasury PS28m over its 12-year life. Liberatore argues that such premiums are unnecessary as they suggest that investors must make a choice between achieving the highest returns and funding sustainable companies or project.
Recommendation

King believes that green debt is more stable than conventional debt because it tends to change hands less frequently. Scott Freedman, a portfolio manager with Newton Investment Management, says that green securities tend to fall less in price during periods of higher fixed income markets. “They have more loyal holders.” Freedman warns against buying green bonds randomly, especially if it means sacrificing performance. He says, “We aren’t interested in buying a bond just for the label.” “We are not mandated by our clients to accept lower returns.”One alternative to green bonds, championed by investors including Freedman, is so-called sustainability-linked bonds. These bonds don’t have any proceeds set aside for any purpose. Instead, they penalize the issuer by requiring higher interest payments for investors if the issuer fails meet certain sustainability targets such as reducing carbon emissions.
Recommendation

The market for sustainability-linked debt is much younger and smaller than that for green bonds — the first such bond was issued two years ago by Italian energy group Enel — but Freedman argues they are “more powerful” in funding the transition to a low-carbon economy.Sustainability-linked bonds are also more suitable for the traditionally polluting industries that are trying to make themselves greener, argues King. For example, Total, a French oil company, has pledged to issue only this type of debt earlier this year. It has the potential to be the standard.

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ESG Investing Conference