Green bonds: how active management intends to make the most of a dynamic sector

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Author: Johann Plé, Senior Portfolio Manager, AXA IM Core

The financing market for environmentally friendly projects and businesses has already reached $ 1 billion by certain measures and we expect it to quickly exceed this threshold. benchmark in 2021. This, along with growing political support in Europe, the United States and China, has helped make the green bond industry a powerful attraction for investors. Increasingly, they are aware that climate change is a threat to our economic well-being, and that green bonds can potentially be a crucial element in addressing this threat.

In our view, this is one of the most dynamic areas on the road to a sustainable global economy, and an area where deep active management can help generate financial returns as well as real environmental impact. As with any dynamic asset class, the trend can be dramatic. Green bonds have moved from a focus on issuance linked to sovereigns and a few utilities to a more balanced mix that attracts much more diverse sources of credit.

Active management can allow us to adapt to the pace of market changes and allocate the more defensive / expensive parts of the universe when needed, and its most attractive and higher-yielding parts when opportunities arise. present. Another potential benefit for active investors is access to primary issues – which provide liquidity and avoid the additional transaction costs in the secondary market faced by a passive / exchange traded fund (ETF) approach.

Provide impact

Perhaps the most common question when investors look at green bonds is how confident they can be about what is green and what is not. The market can grow each year, but no regulations have yet emerged allowing consistent definitions of environmental objectives and parameters, or ensuring consistent transparency around the issue. Again, an active approach is crucial to ensure the selection of credible green bonds in the universe in a clear and straightforward manner for clients. We believe that it is important for the big players in this market not only to benefit from the potential financial returns, but to support truly significant environmental projects of companies whose strategies are aligned with the energy transition.

An active approach can allow investors to focus on the emitters that offer the most transparency about the projects they finance and their potential impacts, such as tonnes of CO2 avoided. This type of information allows investors to understand the true nature of green bonds, to know precisely how their money is financing a change and to what extent it is contributing to it. This is a fundamental aspect of investing in green bonds that a passive approach would simply miss.

AXA IM

Active and committed

To truly participate in the energy transition, it is not enough to buy green bonds. We are deeply committed to the stewardship of all of our assets and believe this helps us stay close to the heart of the green bond market. We believe it makes sense to maintain an ongoing dialogue with existing and potential issuers on how they might start, continue or increase their engagement depending on their specific business activity.

Our analysts met nearly 90% of the issuers we hold in our green bond strategy, and more broadly, our membership in the ICMA Green Bond Principles Executive Committee enables AXA IM and its clients to have their say in promoting industry guidelines to improve transparency and disclosure. We also closely monitor the market, to reward issuers with allowances when they improve their standards, or to review investments that do not meet our standards.

Put it to work

Our green bond strategy seeks to produce impact alongside returns, but how can asset managers ensure that issuers meet these standards when developing a strategy?

Before assessing the credibility of a green bond issue, our approach is first to filter the universe to reflect our exclusion policy at the group level and to eliminate any controversial activity, sector or issuer that could be associated with poor environmental, social or governance conditions (ESG practices). Our ESG rating system helps identify poor ESG issuers.

But what really makes the difference is our owner green bond framework. It is the tool with which we seek to overcome the lack of common measures in the market, by setting clear and consistent standards that issuers – and clients – can understand. The framework is the engine of our active strategy.

It is designed to provide an overall assessment of each obligation considered and aims to ensure that projects earmarked for funds by a company reflect a broader commitment to tackle climate change. We assess the sustainability strategy of the issuer, the demonstrable environmental benefits of the projects to be financed, the management of the bond proceeds and the issuer’s impact report. The framework also requires a high level of transparency.

This combined approach refines the investment universe to eliminate around 25% of issuers. The objective is to minimize the risk of “green washing” while building a diversified strategy that avoids “extreme” positioning and ensures consistency over time.

Transparency is also vital on our side. We believe that a green bond strategy should be able to measure and report on its environmental benefits to investors. This is why we produce a monthly impact report which includes specific indicators – such as avoided emissions – as well as details of the environmental projects financed. We also map investments to the United Nations Sustainable Development Goals.

It is impossible, we believe, to offer this depth of management without an active approach. Since we developed a green bond strategy, we have sought to be a pioneer and a benchmark for the sector, ensuring to strengthen its credibility and support its growth. Only with high standards, careful research and a commitment to good management can we truly limit merger risk, eliminate controversies, prevent ‘green laundering’, improve access to the primary market and shape the nature of the show. By doing all of this, we believe that an investment manager should be able to generate more attractive returns and limit losses, while having a real impact in the fight to meet the challenge of climate change.

This document is for information purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments in accordance with MiFID (2014/65 / EU), nor does it constitute from AXA Investment Managers or its affiliates an offer to buy or sell investments, products or services, and should not be considered as a solicitation or investment, legal or tax advice, recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

Due to its simplification, this document is partial and the opinions, estimates and forecasts it contains are subjective and subject to change without notice. There is no guarantee that the forecasts made will come true. The data, figures, statements, analyzes, forecasts and other information contained in this document are provided on the basis of the state of our knowledge at the time of the creation of this document. While every precaution has been taken, no representation or warranty (including liability to third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained in this document. Reliance on the information contained in this material is at the sole discretion of the recipient. This document does not contain enough information to support an investment decision.

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In other jurisdictions, this document is issued by subsidiaries of AXA Investment Managers SA in those countries.

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