At launch in 2017, the Responsible Horizon Euro Corporate Bond Fund was one of the first bond funds with a focus on sustainability. The fund has since achieved solid outperformance, but this is not due to the sustainability filters the fund applies, according to fund manager Lutz Engberding of Insight Investment, a boutique of BNY Mellon Investment Management.
“Rather, our ESG integration with a best-in-class approach and the exclusion of the biggest polluters in each sector does not negatively affect performance,” Engberding said in conversation with Investment Officer’s sister publication Fondsnieuws.nl. The outperformance by around 50 basis points per year on average is, according to him, the result of sector allocation and the selection of individual credits, just as with a non-sustainable corporate bond fund.
The policy of excluding certain sectors, such as tobacco and the companies with the worst ESG scores in their sector, has in some cases even had a demonstrably negative effect on returns, said Engberding. “The exclusion policy sometimes stings. I know cases of certain companies that were very attractive from a fundamental perspective, but were simply excluded from our investment universe because they did not meet our sustainability requirements.”
Yet the consequences of this should not be exaggerated either, he explained. “Individual stock picks may turn out to be slightly different from a non-ESG fund, but the impact on performance is ultimately negligible,” said Engberding. “It is not possible to say at this point whether screening for sustainability will outperform or not. A longer track record is needed for that,” he concluded.
Shell does not have a strong sustainability profile
Yet the sustainability focus of Engberding’s fund does make a difference. The fund has an 11% allocation to social and green bonds and the most polluting companies are excluded. As a result, the carbon footprint of the fund is 40 percent lower than the benchmark. Across the universe, the fund excludes 13 percent of companies, but in carbon-intensive sectors such as utilities and energy, the percentage is significantly higher. “We only want to invest in companies that are energetically working on the energy transition, so we have excluded certain companies in the sector.”
ExxonMobil and Shell, for example, are excluded. “Shell does not have a strong sustainability profile compared to other companies in the sector, such as Total,” he said. “Moreover, they violate the principles of the UN Global Compact, so we do not invest in them in any case.”
New impact strategy
Whether SRI can provide outperformance in the long term is still uncertain, according to an Insight Investment analysis. However, the firm is convinced that a focus on sustainability reduces risk, which is why the it is in the process of launching a specific impact strategy that will invest at least 75 percent in green and social bonds. Determining the exact impact of bonds is labour-intensive, because a label alone says nothing about how green or social a bond really is.
Engberding explained: “We therefore do a separate analysis for each green bond that comes onto the market. Is the company making a real, new impact with this bond or is it a refinancing?”
The question is also addressed of exactly how green a project is that is financed with the proceeds of a bond issue. The so-called Green Bond Principles of the International Capital Markets Association (ICMA) are not very strict. For example, a bond of which the proceeds are used to replace a coal-fired power plant with one that runs on natural gas can be considered green under these principles, which would be fiercely contested in some green quarters.
Banks
An example is the banking sector, the largest issuer of green bonds in Europe. “Many green bonds issued by banks are used to increase their buffers”, said the earlier analysis by Insight. “That money cannot be specifically linked to projects and can also be converted into equity if a bank collapses. That is a questionable set-up for green bonds,” the analysis said.
A separate analysis of green bonds from the Netherlands by Insight’s own data tool indicates that ABN Amro scores only yellow instead of green. ABN Amro was one of the first banks to issue a green bond in 2015. 80 percent of that issuance used to finance residential mortgages instead of renewable energy. In this particular case, all Dutch mortgages for new homes appear to qualify as green financing. However, the threshold for this is extremely low: if a new-build home emits less CO2 than the average existing home, then it counts as a ‘green’ investment for ABN Amro.
Fund facts:
The Responsible Horizons Euro Corporate Bond Fund has been around since 2017, making it one of the first funds with an explicit sustainability focus. It was based on the Insight Sustainable Euro Corporate Bond Fund, which merged with the Responsible Horizons Euro Corporate Bond Fund this April. Over the past three years, the fund has achieved an annualised return after costs of 3 per cent (IE00BKWGFQ61). That is about 50 basis points above the benchmark, the Bloomberg Barclays Euro Aggregate Corporate Total Return Index. The fund’s assets now amount to almost 900 million euros.
Insight Investment has a total of 824 billion euros under management.