A LITTLE over a decade ago, a group of Swedish pension funds phoned the World Bank looking for a way to lend money to projects fighting climate change. The result was the first ever Green Bond.
Today, it’s a market that is growing rapidly.
The number of green, social and sustainability bonds issued in Australia in the first half of 2021 almost equalled the total for 2020.
The variety of issuers is growing too, with more than 30 different institutions issuing bonds across a wide range of sectors.
“This is a market that is becoming more sophisticated and we’re pleased to be able to participate in this fast-growing market,” says Murray Ackman, a credit ESG analyst at Pendal Group. (ESG stands for Environmental, Social and Governance).
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A defensive bond fund with strong performance and positive environmental and social outcomes.
“We believe the future of investing will continue to be directly funding impact to benefit our environment and the less fortunate.”
So what is a green bond? And how can they play a part in a well-constructed portfolio?
Fundamentally, the term green bond refers to a bond issued to raise finance for a climate-related solution such as clean energy or energy efficiency.
Similarly, a social bond raises finance for an initiative that aims to improve social outcomes in the community like affordable housing or support for indigenous people. You can read here about a social bond that helped put a roof over the head of Sam and his family.
Green bonds can form an important part of a responsible investing portfolio. Financial advisers are rapidly turning towards responsible investing, according to industry researcher Wealth Insights.
About 40 per cent of Australian advisers now offer responsible or sustainable investing products to their clients. This is expected to rise to 50 per cent by next year — and two-thirds by the middle of the decade.
Pendal participated in a few different types of bonds this year, including a bond issued by the Asian Development Bank which funds projects that improve gender equality and women’s empowerment, known as a gender bond.
The funds raised will be used in projects including training and financing women entrepreneurs in Sri Lanka and providing vocational training to women in Laos.
Other types of green bonds include the Climate Awareness Bond from the European Investment Bank, the lending arm of the European Union.
This bond funds renewable energy and energy efficiency projects across Europe, including an offshore wind farm near Portugal, a battery factory in Poland and an energy efficient shopping centre and railway station in Finland.
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Closer to home, the NSW Treasury Corporation Green Bond funds green projects including low carbon transport and buildings, renewable energy and land conservation.
Elsewhere in Australia, the National Housing Finance and Investment Corporation provides cheaper and longer financing to community housing providers to increase the amount of affordable and social housing in Australia.
How can green, social and impact bonds play a part in a portfolio?
Ackman says the performance of green bonds shows they can take the place of traditional bond allocation in a portfolio – and that many investors are taking a broader look at the market.
“We’re finding more and more clients incorporating funds that invest in green, social and sustainable bonds as part of their normal bond allocation,” he says.
When choosing which bonds to invest in, Ackman cautions against simply investing in any bond that says it will bring about an impact.
“We have a rigorous process where all criteria must be met before we can invest. Our impact goals are to find investments that seek to achieve targeted environmental and social outcomes in addition to financial returns,” he says.
Sometimes, the other activities of an issuer can be a warning sign.
“We won’t even look at an impact bond if we’re not happy with the issuer. A tobacco company with a green bond to recycle packaging would not pass our screens or our sniff-test of a sustainable issuer.
“With use of proceeds bonds, we must be happy with the underlying projects.”
Ackman says he has seen a number of impact bonds that ostensibly would support people who impacted by COVID.
“However, after looking a bit closer, we determined these weren’t the types of bonds we wanted to invest in as there were really just repackaged vanilla bonds.”
The other important thing to consider is how much impact the bond will have, what Ackman calls the ‘bang-for-buck’.
“We have an impact database so we calculate and compare how much impact we are helping to achieve by each bond.”
Read the green, social and sustainability bond full report here
Murray joined Pendal in 2020 to provide fundamental credit analysis and integrate Environmental, Social and Governance (ESG) factors across credit funds.
Murray has worked as a consultant measuring ESG for family offices and private equity firms and was a Research Fellow at the Institute for Economics and Peace where he led research on the United Nations Sustainable Development Goals.
Pendal Sustainable Australian Fixed Interest Fund is a defensive Australian bond fund that delivers market-leading performance with positive environmental and social outcomes.
The fund is managed by Pendal’s Bond, Income and Defensive Strategies team — one of the most experienced and well-regarded in Australia, managing some $22 billion invested across income, composite, pure alpha, global and Australian government strategies.
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