As interest in bonds grows, non-traditional bonds, such as green bonds, are rising up the agenda, reports Deborah Nason for CNBC. According to Nason, Edward Schmitzer CFP®, president and founder of US-based wealth management firm Capital Advisors, places responsibility on the financial crisis of 2007 for lower interest rates triggering non-traditional investment mandates. However, he notes that non-traditional bonds may be less popular with financial advisers due to a lack of awareness and promotion.
Shane Yonston CFP®, principal adviser at Impact Investors, a US-based wealth management and investment advisory firm, supports environmental change proactively by working with green bonds or climate bonds, writes Nason. These are linked to environmental projects such as land conservation, environmental clean-ups and renewable energy, and can provide tax-free returns. “They are for a targeted impact with tax efficient income,” Yonston says. “It’s a stable asset – much more stable than corporate bonds, and you’re helping a city do more environmental projects.”
The halo effect
While green bonds are positively connected to social impact, there is increasing evidence that they could also lead to lower long-term financing costs and have a positive impact on share prices, according to a panel at the Climate Bonds Initiative annual conference, reports Shanny Basar for Markets Media.
The conference, which took place 5–7 March 2019 in London, included a panel with Dr Arthur Krebbers, sustainable finance coordinator at NatWest Markets. According to Basar, Krebbers said there is substantiation of a “halo effect” with green bonds.
He explained: “The entire green debt curve trades at tighter spreads than a non-green curve. The halo effect is extending into equities as the green bond issuers can see their share price outperform, as profitability and return on assets improve.”
Basar reports that, according to a NatWest survey in September 2018, investors prefer purchasing bonds with strong sustainability credentials and firms with a “strong environmental, social and governance profile are likely to have improved access to debt capital markets”.
Caroline Harrison, research analyst at the Climate Bonds Initiative, was also on the panel. She said that “she had analysed US$156bn of bonds between 2016 and 2018, with green bonds making up approximately 30%. Green bonds attracted more investors during book building but the data on pricing was 50/50”.
Another panel member, Dejan Glavas, a PhD candidate in sustainable finance at ESCP Europe, a European business school, spoke about his research into equity investors’ reactions to announcements of a green bond issue. He said: “There is a statistically significant positive reaction, especially after the 2015 Paris climate change agreement.”
And panel member Ben Powell, head of climate and sustainable finance at Nordic bank SEB, reported that bond issuances as a whole fell in 2018, but that green issuance grew. He also noted that some markets could “need a blue-chip issuer to launch a green bond market, such as a government issue, which sets a benchmark, such as in France”.
Bonds and climate change: the state of the market 2018
was issued by Climate Bonds Initiative on the first day of the conference. Points that Basar highlights in the report include that Kenya, the Netherlands and Egypt have “foreshadowed 2019 green issuance”; and a prediction that green bond issuance in 2019 will range from US$140bn to US$300bn. Powell adds that “there is a trickle down from sovereigns to corporates” and “the green bond market has a lot more capacity and there is also the potential for securitisations and green loans”.
Markets Media article
The interest in green investments is clearly on the rise, but are there obstacles to accessing them? The UK's Prudential Regulation Authority holds “the key to billions of pounds of planet-saving assets”, says the Association of British Insurers (ABI), according to Ken Symon for Scottish business news website Insider.co.uk.
Symon says that the ABI wants to make it simpler to invest in green assets and it believes unlocking these investments could mitigate the global impact of climate change. “UK insurers alone hold more than £1.8tn in invested assets, with many more trillions managed by investment firms and banks. Currently only 1.2% of all assets under management in the UK are invested in greener projects such as renewable energy – collectively known as ESG or environmental, social and governance assets.”
The ABI mentions various barriers to increasing this proportion. Some of the reasons include a shortage of high-quality and consistent ESG data, making it a challenge to identify the best opportunities for green investments, and “the current prudential regime for insurers doesn’t adequately reflect the long-term nature of insurance”. Another barrier mentioned is the Solvency II Directive
, an EU law that codifies and harmonises EU insurance regulation, effectively disincentivising insurers from making long-term sustainable investments.
The ABI thinks there is a role for regulators to play to help improve the data available to firms and initiatives that insurers could invest in, and in reference to the regulatory regime, it believes more should be done to take sustainability factors into account, writes Symon.
Steven Findlay, head of Prudential Regulation at the ABI, says: “Moving our world towards a lower carbon economy is in the interests of everyone, which is why we are setting out some steps to help unlock billions of pounds of investment for innovative, greener projects.”
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