Green bonds in developed markets often appear greener than their counterparts in emerging markets. But investors should read too much into this, according to Maxim Vydrine, manager of the Amundi Emerging Markets Green Bond Fund.
‘The positive environmental impact of a green investment in emerging markets is often greater than a comparable investment in Western Europe,’ Vydrine says in an interview with Investment Officer. ‘In terms of emission reduction, you can often achieve much more by investing in green bonds in emerging markets. How much greener can you make a country like Sweden, for example?,’ he notes.
On average, companies in emerging markets that issue green bonds have lower ESG scores than their counterparts in developed markets. Yet according to Vydrine, this does not mean that they are by definition less green. ‘Western companies are often better prepared for questions on sustainability and know better how to report on impact.’ The average ESG rating of the bonds in Vydrine’s fund portfolio is C-.
Vydrine emphasises that all bonds in which the Amundi Emerging Markets Green Bond Fund invests meet the ‘Green Bond Principles’ of the International Capital Markets Association (ICMA). But this does not mean that they are all just as green as these principles are not too strict. A bond can already be called green if the proceeds are used to realise ‘environmental benefits’. https://www.icmagroup.org/sustainable-finance/the-principles-guidelines… Reducing CO2 emissions compared to the status quo is already sufficient in principle.
Russian Railways
For example, a bond of the Russian Railways, of which the proceeds are used to electrify a part of the railway network, counts as a green bond, while the electricity that will be used for this purpose does not necessarily need to come from renewable sources. The Russian state railway company’s bond is the third largest in Vydrine’s fund, with an allocation of 3.46% (end of March 2021).
‘Even in countries that rely heavily on coal for electricity production, a conversion from diesel to electric locomotives can lead to emissions reductions in the long term, provided that the country adjusts its energy mix towards more sustainable sources,’ says Vydrines. According to data from the International Energy Agency (IEA), Russia produces about 18% of its electricity from renewable sources, mainly hydropower. According to Vydrine, a Russian himself, it is not clear to what extent the electricity used by the Russian railways will be generated sustainably.
However, there are ‘green’ bonds that are not green enough for Amundi’s green bond team either. ‘We take the risk of greenwashing very seriously and we thoroughly analyse each individual investment for this risk,’ he says.
In the on-shore market in China, by far the largest issuer of green bonds within emerging markets, there are quite a few ‘green coal’ bonds in circulation, according to Vydrine. ‘These include utilities that invest in green energy, but still mainly use coal to generate electricity. We don’t invest in this kind of companies.’ The same goes for green bonds from airports, the proceeds from which are used to expand airports, he says. ‘But if the proceeds are not going to expand an airport, then in principle we can invest.’
Sustainability-linked bonds
The characteristics of green bonds in emerging markets (less green, but more impact) seem to make the asset class perfectly suitable for a relatively new type of sustainable bond: the sustainability-linked bond. The proceeds of such bonds are used to realise a predetermined environmental objective.
‘There are some interesting investment opportunities in this category’, Vydrine says cautiously. But the Russian mainly sees obstacles. ‘The question with this type of bonds is how ambitious the goals that companies set themselves are, and how they are measured. A 10% reduction in CO2 emissions, for example, might be achieved without any extra effort.’
Because sustainability-linked bonds are relatively new, there are no standards yet. ‘It is very difficult to measure the impact. With green bonds, you can show how much CO2 reduction has been achieved per million dollars of invested capital. With sustainability-linked bonds, that’s not possible. That also makes it less interesting for our clients, who often want to measure their carbon footprint,’ says Vydrine.
Green credit
Whereas in Europe governments and so-called ‘supranationals’ such as the European Investment Bank have taken the lead in issuing green bonds, by far the majority of issuers in emerging markets are corporate-owned. ‘That’s good for the return perspective and diversification,’ says fund manager Maxim Vydrine. The greenium, or the difference between the return on a green bond and a regular bond, is about the same in DM as in EM, but the absolute return is much higher in emerging markets. Issuance by national governments has been increasing. Examples include Egypt, Indonesia and Chile.
Over 80% of the Amundi Emerging Markets Green Bond Fund portfolio consists of corporate bonds. Vydrine says: ‘By far the largest sector in which we invest is utilities. These are, for example, electricity companies that issue bonds to finance the construction of wind and solar parks. There are a large number of these in India, among other countries. China, with an allocation of 11.74%, is by far the largest issuer of green bonds in emerging markets and is significantly underrepresented. This is partly because we only invest in bonds in hard currency, especially dollars and euros, for this fund. But there are also enough interesting investment opportunities in markets where mainly local currencies are issued. We are therefore investigating whether we can set up a separate fund for this category.’
Quick facts
- The Amundi Emerging Markets Green Bond Fund was launched in July 2020. It has since returned 5,56% after costs and has a little over $200 million in AuM. Amundi overall has € 1,755 billion in AuM as of March 2021.
- Manager experience: Currently deputy head of EM Debt, Maxim Vydrine has been a portfolio manager in the Amundi EM debt team for 13 years. He started his career as an analyst at HSBC in 2004