Bond market turns greener
Responsible investing should extend to government and corporate debt, says the head of a prominent ‘green bond’ fund.
Australia’s bond market has turned a shade greener, with the launch of reportedly the nation’s first “green” bond fund. With the nation’s green and social bond market having grown from its inception in 2014 to reach around $20 billion in 2019 and amid rapid growth in overseas green bond financing, the new fund is unlikely to be the last.
Launched in June 2020, Altius Investment Management’s Green Bond Fund will invest in a range of green, sustainable and social bonds, targeting investments that contribute to reducing carbon emissions.
“What we’re offering to investors is the opportunity to invest in a high-quality debt fund as a potential substitute to an existing composite bond portfolio, with the additional utility of the impact derived from the investments,” said Altius chief investment officer Bill Bovingdon.
“Our wider objective is to provide a vehicle which demonstrates the availability of green capital in Australia. We see that as a potential virtuous cycle—we are in conversation increasingly with potential issuers into the market and encouraging them to bring more green bonds to market, as we see quite a lot of unmet demand in the green bond space.”
The fund’s top holdings include bonds issued by the NSW, Queensland and Victorian governments, together with domestic and international bank issues. It has been backed by the Clean Energy Finance Corporation (CEFC), which reportedly has plans to invest about $70 million or more, together with private wealth manager Crestone.
Although restricted to wholesale investors with a minimum initial investment of $100,000, Bovingdon said there could be future opportunities for mum-and-dad investors.
“We’re not ruling out retail products as we think these offerings will resonate with retail investors as well … there’s been a recognition that responsible investment options should extend beyond equities to bonds,” he said.
The new fund adds to Altius’ other green offerings, including a sustainable bond fund and sustainable enhanced cash fund, with the fund manager seen as an early mover in Australia.
Some companies have drawn criticism for “greenwashing” investors concerning their investment claims, causing scepticism towards the sector.
However, Bovingdon points to the fund manager’s “comprehensive” processes, including negative screening, positive sustainability selection and an independent advisory committee.
Altius evaluates green bonds against international standards, including the “Green Bond Principles” issued by the International Capital Market Association and those of the Climate Bonds Initiative (CBI).
“A green bond doesn’t necessarily have to be certified by these organisations, but it needs to follow the principles … We would divest quite publicly if any of the bond issuers were to not meet their underlying obligations or promises,” he said.
Bovingdon aims to grow the new fund to about $500 million “in pretty short order, a couple of years,” also indicating further opportunities in mortgage financing such as “green” home loans.
“The pipeline is very healthy … projects such as the renewable energy zones in NSW and the solar cable project in the Northern Territory are going to need lots of funding,” he said.
“From an issuer’s perspective, over time there could be a lower cost of funds once a deep and regular market is developed for their green bonds.”
Lower costs have been a highlight for recent European issues, even potentially sparking a “brownium” charge for conventional debt.
This follows recent green bond issues by European automakers Daimler and Volkswagen together with French telecommunications giant Orange, with all such bonds priced significantly lower than their existing debt.
According to Bloomberg estimates, Volkswagen is set to save almost 3 million euro ($4.9 million) a year from its recent green issues, with both the automaker and Orange saving up to 15 basis points.
Companies with weaker environmental, social and governance (ESG) credentials are facing paying a premium, according to analysts.
While sales of ESG bonds make up about 8 per cent of euro-denominated corporate issuance, the growing evidence of a pricing differential could spark further interest in the green bond market, which was estimated by CBI at more than US$250 billion in 2019.
Together with Altius’ new fund, other fixed income offerings for Australian ESG investors include the BetaShares Sustainability Leaders Diversified Bond ETF – Currency Hedged (ASX:GBND), of which at least half comprises international green bonds, or the Vanguard Ethically Conscious Global Aggregate Bond Index (Hedged) ETF (ASX:VEFI), which excludes companies with business activities including gambling, nuclear power and tobacco.
John Likos, director of investment management at BondAdviser, suggests Australia could see more such funds emerging in response to client demand.
“You can expect more focus on socially responsible investing and ESG-based investing and as a result of that you’re probably going to see an increase in investible options in those areas,” he said.
“I don’t think the local market is big enough yet for green bond funds to start popping up everywhere, but the trend will be towards more such offerings over time.”