An active fund that mainly invests in green and social bonds from emerging markets was not available until last month, when the BlackRock Emerging Markets Impact Bond Fund was launched. The new fund is one of the first two EMD funds with an Article 9 rating under the SFDR.
Schroders narrowly outpaced the US asset manager by launching the Schroder ISF BlueOrchard Emerging Markets Climate Bond fund in June. The fund invests in green bonds in emerging markets. Blackrock’s new fund has a broader mandate. Besides green bonds, it also invests in social bonds and so-called “sustainability bonds”, bonds that are usually issued by banks and finance a mix of green and social projects.
Fondsnieuws, Investment Officer Luxembourg’s sister publication, spoke with portfolio managers Jack Deino and Michel Aubenas (pictured), two of the managers of the new fund.
Investors have been asking for an EMD impact fund for years. Why is it only now coming?
Aubenas: “The answer to that question is simple. Until recently, there was simply not enough supply to create a balanced portfolio. Until recently, only a handful of countries issued green or social bonds at all. Today, we have government bonds from more than 20 countries and 100 corporate bonds. That was enough for us to start a fund.”
What is the portfolio like?
Aubenas: “70% of the portfolio consists of corporate bonds and 30% of government bonds. We now invest half in green bonds, 30 percent in social bonds and the rest in sustainability bonds, cash and other bonds that meet our ESG criteria.”
“At least 80 percent of the portfolio,” he continued, “must be invested in “official’”green, social or sustainable bonds according to the guidelines of the International Capital Markets Association (ICMA).”
Deino: “At the moment there are only 34 bonds in the portfolio, but the objective is to increase that to 50 to 70 as more bonds are issued in the target group. After all, the market is growing rapidly. In the three years to 2023, the International Finance Corporation (IFC) expects a doubling of issued green bonds from the 226 billion dollars so far to an additional 260 billion dollars. By 2021 alone, emerging markets have already issued $25 billion in sustainable bonds, almost exclusively in dollars, by the way.”
Some investors are reluctant to invest in sustainable bonds in emerging markets because of the risk of greenwashing. How do you try to overcome this?
Deino: “I do have the impression that greenwashing is relatively common in emerging markets, but I don’t think this is usually done intentionally. Sustainable finance is still a new phenomenon there. But deliberate greenwashing does happen. To overcome this, our team of analysts spends hundreds of hours each year in contact with publishers. This involves both the question of how they are going to spend the proceeds of the bond issue and verification afterwards. We also classify all bonds from light green to dark green, or light gold for social bonds. Twenty per cent of the debt securities in the universe do not pass that first test and are therefore not investable for us. That does not mean we cannot invest in light green bonds, because we do. But in those cases we do keep an extra finger on the pulse of the issuing party. We want them to show progress in their sustainability targets. If that does not happen, we sell those bonds again. We also do not invest in sustainability-linked bonds.”
Why not?
Deino: “Sustainability-linked bonds (bonds whereby the issuer links the level of the interest rate to a sustainability objective to be achieved) are enormously popular, and currently even form the majority of issues in emerging markets. If the instrument is structured correctly with sufficiently ambitious targets, it can be very interesting. But at the moment we do not invest in it, because we think the risk of greenwashing is too great. Too often, the targets that companies set themselves are not ambitious enough.” [Deino prefers not to give an example of such a bond].
Are there any other instruments in which you do not invest?
Deino: “We do not invest in bonds issued by weapon producers or companies involved in the sale of small arms or tobacco, because we do not consider that to be in line with our sustainability objectives. We do not specifically exclude fossil fuels. However, we do set the condition that these companies use the proceeds of their green bond issues to accelerate the energy transition. We absolutely want to avoid contributing to the preservation of an environmentally polluting industry such as the oil and gas sector.”
And what about social bonds issued by non-democratic countries, such as China?
Deino: “Social bonds are still very new in emerging markets. We invest in issues by the Chilean and Mexican governments. The proceeds of the Chilean social bond, worth USD 1.6 billion, are being used to finance education, health care and projects to mitigate the effects of the Covid crisis, among other things. We have not yet come across any social bonds that do not meet our criteria. Whether or not we will invest in a social bond from China, for example, I cannot say. That will really depend on how they spend the money.”