Green bonds are becoming mature and are a good diversification in a portfolio because they provide above-average transparency, according to Julien Bras (photo), bond manager at Allianz Global Investors.
Bras argued that green bonds are an interesting way to get more diversification in bond portfolios. “The main argument for me to include green bonds in portfolio is their transparency compared to traditional bonds.”
At the time of issuance, the issuer commits to start investing the proceeds in environmentally sustainable bonds. Moreover, the investor gets regular reporting of what happens to the money afterwards. Finally, and this is not an obligation but is increasingly common, issuers will report on what impact a green bond actually has. As an investor, that is a real asset’. Bras also finds it an advantage because, as a fund investor, he can explain to his clients how their money is making a difference.
Bras does think it is important to stress that in terms of liquidity, yield and rating requirements, there is no difference between a classic bond and a green bond.
Green Bond Principles
The Green Bond Principles used as a framework for green bonds is very strong, according to Bras. The framework has existed since 2014 because it “focuses on the right and correct standards without being too restrictive”. The standard in Europe, which is currently being rolled out, leans very close to the Green Bond Principles.
“That will help us a lot,” said Bras. “That is going in the right direction and is also not too complex. The green Bond framework has four major principles or recommendations, first that there is a commitment by the issuer to use the proceeds for green projects, second, there is a tracing method to track where the money is flowing, third, a system exists at the issuer to select the projects, and finally at least annual reporting.”
The European framework, currently in the pipeline, adds two more important elements or principles. Firstly, there is an external verification that takes place, where an auditor checks how the money is used, and secondly, an element at issuer level. This is because it verifies whether that issuer has a sufficient strategy in terms of environmental transition.
“For us as fund managers, the latter element is certainly important, because we want to ensure that the companies we invest in not only have their business strategy in order, but that their business model is also aligned with the principles of the Paris Climate Agreement.”
In a nutshell, Bras said he believes that the European rules around Green Bonds and the framework associated with them are “perfectly in tune” with the needs of the market and investors.
Portfolios
Bras manages a fund that manages at least 85 per cent in green bonds, and holds up to 15 per cent cash. “Those issuers must be aligned with the Green Bond Principles and with the list we have drawn up ourselves within Allianz, and also comply with the European Taxonomy. The issuers must also have a credible transition strategy.”
The fund has an overweight position in corporate bonds versus supranationals, agencies and government bonds. “We want to keep it that way because we think the private sector is even better at driving change than government, although there is still a way to go,” Bras said.
This article originally appeared on Investment Officer Belgium.