What to Look for in Asset Managers Offering Green Bonds
For investors, the key appeal of green bonds is that they have financial traits that are similar to traditional bonds but are designed to have a measurable impact on the environment. The challenge, however, is being able to know if a bond is, in fact, green. The widespread adoption of voluntary green bond guidelines has boosted transparency and credibility in the market by encouraging issuers to provide key information about the climate benefits their bonds aim to deliver. While this has helped increase investors’ confidence in these securities, regulators around the world are considering further rule changes to address the challenge of “greenwashing,” the practice of making exaggerated or misleading claims about the environmental credentials of a company or a financial product.
We believe that investing in green bonds requires the same active investment approach as traditional bonds. Ultimately, the goal of any fixed income investment is to maximize risk-adjusted returns, and green bonds are no different. Selecting an asset manager with a strong fundamental research process and robust risk management is crucial, and can help investors avoid controversies, limit downside risk and uncover the opportunities with the most attractive potential returns.
Analyzing Green Impact at a Bond and Issuer Level
In active management of green bonds, it falls on the asset manager to analyze the use of proceeds at a project level. We believe it is important to use asset managers that employ screening criteria to align with green bond guidelines such as the widely adopted International Capital Market Association’s Green Bond Principles and the Climate Bonds Standard.
It is also important to find an asset manager that can consider the overall sustainability profile of a green bond issuer beyond a single issuance. We believe that asset managers who have frequent dialogue with issuers throughout the life of a bond – from preparing for issuance to reporting on impact – can deliver results that benefit investors. This regular contact gives the manager a better understanding of both the issuer’s sustainability profile and the individual issue (and its use of proceeds) to help ensure exposure to bonds and companies that do not overstate their impact. Engagement with bond issuers is particularly important when it comes to high-yield and emerging-market issuers, as these companies or governments often have fewer resources to devote to thorough sustainability reports.
For a green bond with a 10-year maturity for example, an asset manager needs to have the ability to monitor and understand the project’s environmental impact over that time horizon. And just like traditional asset managers, asset managers reviewing green bonds should conduct credit analysis to provide a fundamental view of a company’s credit-worthiness and its ability to meet financial obligations.
Staying Active
We believe it is important that asset managers also employ a stringent selection process that looks beyond the green label to evaluate an issuer’s activities and its plans to adopt more sustainable business practices. One way to assess an asset manager’s green bond selection criteria is to understand why it did not invest in certain green bonds.
Reporting on Green Impact
Another factor to consider is whether an asset manager provides regular detailed reporting on the environmental impact of green bond investments in addition to financial performance reporting. Some asset managers aim to map investments to the United Nations’ Sustainable Development Goals (SDGs) as well. Examples of green bond impact reporting include CO2e1 emissions avoided, renewable energy capacity added, and energy savings through improved energy efficiency.
While companies and governments are reporting more information about their green bond strategies and project financing, impact measurements can differ widely. For this reason, asset managers have a crucial role to play in applying a methodology that allows for aggregate impact reporting at the portfolio level. The key is asset managers employing a robust framework that allows for harmonization of disparate data to produce a single, aggregated result and clearly explaining the tools and methodology they use for this purpose.
Global Reach
As companies from more sectors and sovereigns in more regions across the globe issue green bonds, the universe of green bonds and green bond funds will grow. Asset managers with a global reach and local insights will be well-placed to capture opportunities in the widening green bond market.
Customized Solutions
Ideally, an asset manager can offer a broad suite of investment solutions—with a spectrum of short- and longer-term durations from diverse countries and sectors—that can deliver customized solutions to align with investors’ financial goals and personal values. For example, asset managers could deploy a strategy of investing in short duration green bond funds for a rising rate environment or excluding certain sectors that are unappealing to the investor.
Commitment to Sustainability
Lastly, investors should look for asset managers that are committed to responsible investing and have dedicated sustainability professionals. These asset managers are more likely to have the necessary tools and expertise to apply a sustainability lens at each stage of the investment process, from research to portfolio construction and from engagement to impact reporting.
Though green bonds present an opportunity to have an environmental impact, they also present complex challenges that underscore the need for active management and credit analysis. Applying these selection criteria can help investors find a manager capable of helping them achieve their sustainable investing goals.
1A carbon dioxide equivalent or CO2e is a metric measure used to compare the emissions from various greenhouse gases on the basis of their global-warming potential, by converting amounts of other gases to the equivalent amount of carbon dioxide with the same global warming
