Tuesday, August 16

Looking at a portfolio of 3-year green bonds, the annualized return is between 3.5 and 4%, a good figure for fixed income.

Green bonds have been gaining prominence for a couple of years, this year the Spanish Public Treasury has even joined. What advantages do you see in these assets and why do you think they are vital for the energy transition?

(Bruno) What we are seeing is that there are more and more issues of green bonds, it is a market that is growing and is advantageous for the issuer -because it issues a little cheaper- and on the investor side it is contributing positively with the environment and the fight against climate change, which is a winning situation for both parties. At Eurizon we estimated about 450 million dollars of emissions for this year and it is already at 500,000 at the end of November, so clearly there is great interest in the level of emission. We have seen that Spain has issued a green bond, so has the United Kingdom, and for next year Austria and Greece have announced their intention. In addition, we see a regulation, as in the case of the European one, that is materializing. In the case of the Bank of England, it has officially published its intentions to favor compliant bond issuers and they are also going to examine it closely. The new government of Germany has an ecological tinge and has announced that by 2038 they want to reach zero carbon production. All in all, a lot of very ambitious and very positive goals for this asset class. In short, advantages more emitters, more regulation and feeling good knowing that investment is contributing to the fight against climate change.

(Salomé) The news of the Spanish Treasury debuting in the green bond market a week ago with an issue of 5,000 million euros and a maturity of 20 years, and with great interest because it has been oversubscribed 12 times, it has been important but It must also be said that in Spain we already have a certain tradition in the green bond market and, before the Treasury, local entities such as the Community of Madrid, Andalusia, the Basque Country or Galicia had issued green bonds and at corporate level companies of the the likes of BBVA, Telefonica or Iberdrola too, with which we see that in Spain there is a certain depth of this market and in fact we represent 3% of the world indices. Regarding the advantages of green emissions, for us we do not believe that the greatest advantage is financial, which also exists, but rather the explicit commitment on the part of the issuer to allocate these funds to green projects or that have a fairly positive impact in terms of sustainability. For us, that is perhaps the greatest benefit that we find from this type of emissions. I think the Paris Agreements and the climate change commitment to reach a limit of 2 degrees above pre-industrial levels are quite ambitious objectives for which this type of emissions will help us to commit, because it is a link not only of intentions, but at the legal level they have to achieve it in order to meet those ambitious objectives that we all have to contribute to achieving.

(Bruno) COP26 was recently held in Glasgow and the reality is that 200 countries have signed a commitment to reduce the use of hydrocarbons, with what is clearly a commitment and it is even true that 2 degrees is very ambitious but they are considering lower it to 1.5 above the pre-industrial level. There are clearly important ambitions and clear goals, and at COP26 many countries have reaffirmed their interest.

Its use commits the issuer to allocate the funds to environmental projects or related to climate change, but how are the average returns they are offering? Are they less risky than traditional issues?

(Bruno) What we are seeing is that after 3 years, looking at a portfolio of green bonds, the annualized return is between 3.5 and 4%, which is a good return on fixed income. In 2021, the green bond strategy has not been very profitable for several reasons: because right now there is greater interest in the issue of short-term issues, due to inflation … but if we look at 3 years we are talking about quite attractive returns. Regarding the level of risk, issuers usually have a good average score between A and A + or in some they are triple B, that is, they are good ratings for issuers that are fairly consolidated companies and even governments themselves, with which we could say that the risk is lower. That said, it may not be the most profitable issue at certain times, but looking at all the regulation and all the institutional investors who want to increase its weight, we clearly believe that it is an asset that has the wind in its sails and with a great future.

(Salomé) The reality is that the credit qualities of a general index and a green bond index are very similar. Right now we are at a point where the structure of both indices is quite similar. Regarding corporate and public issuers, it is true that there are still a little more private issuers in the case of green bonds, but what we generally find in all sustainable investments is that we cannot say that they improve profitability or volatility, but in this type of strategy there is such a recurring and transparent information requirement that in the end this always makes it possible for the manager to make a better analysis, so that only the fact that there is more information from the issuer enables us to have better risk control. Regarding profitability, it is true that today we have a little more yield, which is much appreciated in a fixed income market, partly as a result of this greater presence of corporate issuers and partly also that there are green bond indices have a slightly longer duration. In addition, with the inflows we are already seeing the potential of this type of strategy and what the regulation pushes us in terms of sustainability is going to be receiving more and more flows; We will see if we can continue to maintain extra profitability or not, but the reality today is that it exists and given the current environment of fixed income it is very much appreciated.

(Bruno) In the sense of regulation, it should be noted that the EU and the Bank of England insist on the importance of reporting and being transparent and even the Bank of England has communicated that it will sell bonds of companies that are not communicating and are not being transparent , something that links with greenwashing or “eco-posturing”. At the level of information and requirements, the authorities take it very seriously and it is reflected in the regulation.

In the next few years, I understand that green bonds are going to increase. What do Eurizon managers look for when selecting issues?

(Bruno) Obviously we have to look at each project with a magnifying glass, see who is issuing it, find out if there is an external audit and look at other sources of information and as many as possible to find out more about the entity that issues it. In addition, you have to look at the project itself to know what it is going to consist of and what level of audit and control it is going to have. That is the base. Then we have to do an exhaustive follow-up and exchange of information and if we do not receive answers to questions or we see that something is missing, this could imply a decision to sell; In some cases (not recently) we have had bonds in our portfolio and we have realized that the funds were not being used for what was said and have been sold. With this, a strong message is sent that serves so that the issuers realize the seriousness of the situation. Recapping: look at the issuer, each project and make sure that the funds serve what they say and then follow up and exchange information. We also look at the liquidity of the bond, because we do not want to be involved in very small issues.

From Tressis, do you think green bond funds are interesting for moderate and conservative portfolios?

(Salomé) We believe that they are interesting for any type of portfolio that includes fixed income in its composition. In the end, the portfolios have to be looked at a bit at an aggregate level, not only asset to asset, but the fact that we can find a little more profitability assuming long durations and quite similar to the general indexes is something that at least we have to look at. The reality is that the correlation between green bond indices and general indices is increasingly similar; that of green bonds in a market that is growing a lot and at a global level we have already reached a trillion dollars of green bond issues, which is why it is time to lose a bit of that fear that it is a more niche or institutional market, since Although it still is, it is already deep enough so that we can include it in our portfolios with complete peace of mind. In terms of volatility-profitability, it has a lot of correlation with the general indices and we find a little more yield. And that without forgetting the alignment in terms of sustainability, since what we are doing with green bonds is contributing to green projects with our investments, the extra-financial aspect and generating an impact on society and alienating ourselves with the Paris Agreements is something We must also assess when including this type of portfolio strategies when they also make financial sense, since as portfolio managers our first fiduciary responsibility with our clients is to maintain their financial objectives.

Eurizon has a fund like the Eurizon Fund Absolute Green Bonds … what would you highlight about the fund?

(Bruno) It has some peculiarities that explain why it is the largest green bond fund in Europe, since it already has some 2,300 million euros under management. Its particularity is in actively managing possible risks such as, for example, duration, in such a way as to be less exposed in environments of rate hikes; There may also be currency risks because our fund is a global portfolio and we have bonds issued in China, Sucia, the US and even Peru or Indonesia, so we actively manage the exposure to these currencies to analyze the possible impact and that also allows us have less volatility in the fund; and finally we can act in case we see a possible credit risk, for example thinking of a liquid derivative product to protect in case. The idea is to have a portfolio of green bonds but actively managing the risks. The good thing about this fund is that we can measure the positive impact it has and these are some data: for every million euros of assets in the fund we are managing to produce 779 megawatts per hour of clean renewable energy, we also save 187,000 liters of water and reduce the production of carbon dioxide (CO2) by 662 tons per million, with which the impact is very positive. Investor money is contributing to a positive impact in the face of environmental challenges and climate change.


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