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Bonds: Green money

15 May 2018

Invesco Perpetual’s head of ESG, Cathrine De Coninck-Lopez, adds that green bonds are an interesting development in the capital markets. “It has focused attention on the use of fixed income instruments to direct financing in building a low carbon world.

“Corporates that wish to clearly and publicly align financing with their low carbon operational initiatives (and are not pureplay companies) have an opportunity to do so in the fixed income markets, that does not exist in the equity markets,” she adds.

Responsible investor Calvert says that green bonds are one of the fastest growing areas of the fixed income universe and expects the strong underlying trends driving interest in green bonds to continue.

“We believe investors pursuing an active investmen approach from a fundamental and impact standpoint stand to benefit from increased opportunities and more diversified portfolios,” it said in a research paper. “We also believe a disciplined approach with experienced fundamental credit and ESG research teams is critical to success in the sector.”

A DROP IN THE OCEAN

While this market is growing significantly, it only accounts for a fraction of the wider corporate fixed income market. “The green part is about 0.5% of the total global bond market,” Scott Freedman, an analyst and portfolio manager at Newton Investment Management’s fixed income team, says. “It is tiny.”

Meghna Mehta, a senior associate, ESG research at MSCI, is optimistic that this will change. “We are still a drop in the ocean compared to equities and regular bonds, but it is expected to grow.”

Rising climate change awareness as well as companies and governments working to meet the targets set by the Paris Agreement to limit global temperature rises to 2°C above pre-industrial levels could be catalysts that accelerate growth in this market.

Freedman believes that more sovereign green bonds, such as the €7bn (£6.1bn) raised by France’s government last year to invest in renewable energy, could also be a catalyst to encourage domestic businesses to consider using the green bond market to access funding.

More government bond initiatives are needed. To date only the governments of Poland, Nigeria and Fuji have joined France in tapping the market.

The real boost that the asset class needs will come when companies from a wider range of industries and geographies are encouraged to enter the market, which will also improve liquidity.

“It is maturing – there is still a long way to go, but it is moving in the right direction,” Freedman says.

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