Diversification is key to green bonds
At a time of record issuance for green bonds, Rhys Petheram, Head of Environmental Solutions, highlighted the broadening of the asset class as its most attractive characteristic for multi-asset investors. It helps him construct a diversified portfolio, he explained.
While most of the issuance of green bonds (bonds from which the money raised is linked to climate-change or environmental projects) has so far been in investment grade, the high yield green bond market is gaining traction, Rhys said. The total amount of US dollar green high yield bonds raised so far in 2021 is equivalent to that issued in the whole of 2020.
Rhys also welcomed the growth of sustainability-linked bonds (SLBs). SLBs are different from green bonds. SLBs vary their contractual features – such as paying a different coupon – depending on whether the issuing company achieves environmental key performance indicator. They are typically focused on the environmental characteristics of a firm (for example its carbon footprint) rather than the direct environmental impact of its product and services. Nevertheless, Rhys said that when used in combination with a green bond, they become a more powerful, forward-looking instrument, and he noted the recent issue of a combined green SLB bond by a major Austrian electricity company.
Rhys thinks the momentum bodes well for the issuance of the UK government’s green gilt announced in the March Budget, and his team has been working closely with the Investment Association (IA) to provide input into its structuring process, to achieve as impactful a bond as possible. In Rhys’s view, the green gilt is likely to be well supported by institutional investors.
Green central banks
Central banks have been showing signs of turning green, Rhys observed. In the UK’s March Budget, a change was announced to the remit of the Bank of England to include climate change in considerations of economic growth. This will allow the Bank of England to buy green bonds and is likely to bias its portfolio away from companies failing to reduce their carbon footprint.
The Bank of England holds about £20bn in corporate bonds, making it a much smaller player in this market than the European Central Bank (ECB). The ECB’s targeted longer-term refinancing operations, a programme that provides cheap funding to banks for more targeted lending (such as to stimulate the real economy) could become a powerful tool to support green lending, Rhys predicted.
The US Federal Reserve is somewhat behind the ECB but has recently created a committee to look at embedding climate-related risk into considerations of financial stability.
Rhys welcomed these shifts in central banks’ approach. He cautioned however that central banks should limit their role to lubricating the machinery that drives the green economy, rather than attempting to drive it themselves.
Finding environmental solutions companies that are slightly off the radar has never been more important, said Jon Wallace, fund manager in the Environmental Solutions team.
Pockets of the environmental markets universe have come under fire recently for displaying ‘green bubble’-like behaviour. In the case of the clean energy and sustainable mobility sectors, this was fairly justified over the first quarter. However, the environmental investing universe is vast: in this environment, opportunities in sectors such as the circular economy presented themselves, including an interesting company that commercialises biomaterials, to use just one example. Within the environmental solutions strategy at Jupiter, the team use seven broad themes to allow investors to access the full breadth and depth of environmental markets. Given better value could be found elsewhere in this diverse opportunity set, exposure to clean energy is at its lowest in the last three years.
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