Why, for some time now, have green bonds spread in the investment universe? How has the Covid pandemic influenced it?
Bruno Patain. We do not believe that it is so linked to Covid because the first green bond appreciated in 2007 and it is from 2014 when the boom in green bonds was noticed in the financial markets. But one factor must be taken into account: before Covid, the world was realizing that there was a climate challenge, we have a biodiversity risk, less drinking water… several risks that are affecting the planet and whose consequences we are seeing beyond climatic phenomena, as was the case of Filomena.
Why green bonds? Because on the one hand we have regulations in our favour, which will make post-covid reconstruction greener; there are the UN SDGs, the Davos Forum, which has made climate change a priority. An instrument to fight against this is financing projects that save energy or generate renewable energy, treat waste, purify water… that allow us to go to a sustainable world so that society can live better.
We are witnessing more and more green bond issues by States and companies.
Carlos Garay. I think that the Covid has generated a turning point because the green bonds give a boost to the impact and there I do believe that there has been a very important boost because the impact strategy is a sustainable second-generation strategy that is here to stay. There are also two forces that come together: greater investor appetite in order to have this type of issues in the portfolio and we have also seen how these issues have been given a boost. Since 2020, green bonds amounting to almost 300,000 million dollars have been launched and in 2021 they were more than 400,000 million.
Bruno Patain. By 2022, at Eurizon we estimate that there will be 900,000 million, which is an even more significant amount than in previous years.
In a world with interest rates close to zero, what benefit can green bonds give the investor?
Carlos Garay. Green bonds serve to channel long-term sustainable investments into the future. To create an impact, you need it to be long-term, which is why green bonds tend to last a long time. In this market environment and with the erratic behavior of fixed income since the beginning of the year, duration is not the most desirable thing. That is why it pays to have green bond products that have duration flexibility. Eurizon has a product that has this flexibility and, through derivatives, manages to reduce the high duration of the bond.
Bruno Patain. Green bonds are not invested so much in countries or sectors but rather in projects, and a renewable energy or biodiversity project is not short-term. It is true that governments are making longer-term issues than companies, but there is a certain issue of duration, but the positive thing is that it is an asset where more and more actors are realizing the importance of acting against climate change and the message little by little it is reaching all the layers. If we talk about pure yield, our portfolio is offering an IRR of 1.7%, which does not seem that high, but in a context of zero rates, it is very good. In addition, we have a fairly short duration. Although it is true that Europe dominates in terms of emissions, we are increasingly seeing more emissions coming from China or from emerging countries, which emit more efficiently.
What are the main risks of investing in sustainable products?
Carlos Garay. The greatest risk of investing in a sustainable product is incurring in greenwashing, selling a product as sustainable that really is not. Hence comes the regulation with the new taxonomy that will lay the foundations for this to happen less and less. Within green bonds, the greenwashing ratio is low and if we fight against it we will do the sustainable bond market a favor.
Bruno Patain. It is true that “ecoposturing” is a reality. It is something that we ourselves have detected in well-known companies and when this happens we sell the bond. Increasingly, practices are cleaner and the risk of grenwashing is lower. There, the issue of auditing and entities that are going to supervise is important, and then the work of the managers to see projects, have questionnaires and have an active conversation that allows us to know that the investment in a bond goes directly to the projects that they say. And then comes the taxonomy with what in the world of green bonds there are criteria adopted by the managers that are the “Green bonds principles” that help reduce risks.
What would you highlight about the Eurizon Fund Absolute Green Bonds?
Bruno Patain. When we decided to launch our own strategy four years ago, we saw that there were certain risks – duration, excess credit and currency exposure – and we wanted to provide a total return product that could navigate different market environments. It is undoubtedly invested in green bonds, which is what it dominates, trying to reduce these risks through active duration management with derivative products and even actively managing the currencies that we may have. We want to give access to green bonds with less risk and volatility.
Carlos Garay. Due to the specific sensitivity of our clients, we saw that they wanted to focus their investments on sustainable investments. At Sabadell Urquijo Gestión we saw in 207 the need to launch specific products to meet that need. And we decided to launch portfolios of sustainable funds that we call “Future Generation”, we were among the first managers to launch these products and we always do so via funds. We seek these fund portfolios to comply with the regulation, to be article 8 or 9 SFDR and I see more and more presence of fixed income funds with these green bond issues.
On the other hand, I have seen the industry very focused on the A for Environmental and what we have seen with covid is that this focus begins to turn towards the S (social), where health is also involved, and the G (governance) . It begins to focus on another order of things and the impact generates a way to change those investments. It is important to have diversification of sustainable products, cover the entire spectrum – both A, S and G – and rotate and actively manage it depending on the market situation.
Bruno Patain. It is true that the industry is very focused on the issue of the environment and with Covid we are beginning to look at social issues. In terms of governance, we managers have spent several years looking at how company managers behave, what priorities they can give to the social and environmental aspects. In this sense, it is true that we are very focused on the environmental issue, but the S and the G also have a place in the portfolio. And speaking of impact, for every million euros that we have in the fund, we managed to produce 779 MWh for every million, we managed to save 187,000 liters of water and reduce Co2 production by 662 tons. The fund is 2,300 million with which we see a very real impact. And knowing that entities like Sabadell Urquijo promote green investment is increasing the size of the funds that fight against change.