Julien Bras, Allianz Global Investors
Applying ESG to fixed income is relatively new and the result is different from what investors may expect from an ESG product.
For example, companies selected for ESG equity fund portfolios are often said to have business models that outperform non-ESG peers. The ESG filter makes the difference.
However, when ESG is applied to fixed income in the form of the “green bond” (or “climate bond”), the classification has no impact on performance, Bras said.
“There is no reason today for green bond [funds] to outperform standard [bond] funds, and I am not even sure that in the future it will be the case, he said. “The characteristics of a green bond do not have a sufficient weight, compared to other technical factors, to make performance higher or lower versus standard bonds.
“As of today we do not identify any clear difference between a green bond and a standard bond from the same issuer in terms of yield, liquidity, or risk/return profile,” he added.
In fact, the primary goal of a green bond investment is not upside appreciation but “to participate to the reallocation of capital towards the transition to a low carbon economy”, Bras said.
There is a potential bottom line benefit: Should carbon tax increase, green bond issuers would be less impacted than peer companies that have high carbon exposure.
The green bond market is very small. Between 2007 and 2016 only $200bn in labelled green bonds were issued, according to research firm Cerulli, citing World Bank statistics.
However, in 2017 the market picked up: $160bn in labelled green bonds were issued.
ESG in fixed income is mainly limited to corporate bonds and within that, investment-grade corporate bonds, the research firm said in a recent report. “Investors struggle more with sovereign bonds and high-yield debt, where only 21% and 24% respectively apply ESG criteria.”
Bras added that the biggest challenge for the green bond market is to diversify on the corporate side. He would welcome issuance from companies in more sectors, particularly in industrials.
Defining the green bond
Allianz GI evaluates bonds to ensure they are green by using three main criteria. One is transparency. The issuer has to show the actual use of proceeds and the project selection and provide an annual report that includes environmental impact, Bras said.
The firm also only looks for bonds that finance projects with “a clear positive environmental impact”. Finally, an assessment of the issuer’s claim that it is transitioning to a low-carbon business model.
There is no standard formal definition of a green bond. The EU is working on a definition, expected by mid-2019. Some countries, such as China and India, have their own definitions.
“One of the differences with China’s definition is linked to certain types of projects that we do not consider eligible in our strategies, especially projects related to high efficiency coal investments.”
As long as there is no formal definition of a green bond, Bras doesn’t think the “green” classification will have an impact on the rating of the bond. “The risk is with the issuer, not the project,” he said.
Not many pure green bond funds with at least a three-year track record are available. Below are most of them versus the broader Bloomberg Barclays Aggregate Bond Index.
