‘The green bond universe is an attractive alternative to conventional debt’
Provided they are carefully selected, green bonds have major advantages for a responsible investor, not only for their positive impact on climate change but also from an investment returns perspective. Johann Plé, a fixed income manager at AXA IM, sheds light on the current challenges and opportunities in this fast-growing market.
Why is the green bond market developing so fast?
This corresponds to a growing awareness of the climate emergency, embodied in the multiple commitments of both issuers and investors to carbon neutrality. It is also a response to pressure from regulators who now often require companies to report on climate efforts.
Green bonds are an ideal instrument because they allow issuers to identify specific projects to which investors can explicitly allocate their capital. Increased transparency on the use of funds is also a real advantage over conventional obligations. For investors, this is a way to reduce their risks and seize opportunities. It requires them to select green bonds based not only on the projects they finance, but also on the overall strategy of their issuers. In this way, investors avoid those most exposed to climate change and, instead, target those who are best able to take advantage of changing demand.
What are the advantages of this asset class in an allocation?
The green bond universe offers a balanced risk profile: half of it is made up of corporate issuers (compared to 25% in the traditional bond universe) and yet retains a relatively similar sensitivity to rates. The rally in rates and the widening of credit risk premiums seen in recent months make the green bond universe attractive compared to conventional bonds.
Between active and passive management, which should investors choose for this market?
I believe that active management is much more appropriate in the green bond market. Not all green bonds are equal and one should not invest indiscriminately across the universe. Otherwise, this would mean investing in issuers who have some green projects but have no desire to improve their climate profile. With active management, we can exclude this type of issuer. An example of where we do this is airports as they are seeking to put forward projects to improve their energy performance, but at the same time are continuing to expand and develop air transport. That would not make sense for a green investor.
In addition, it becomes possible to generate excess returns by actively managing the “greenium”. This refers to the slight price differential seen between green and conventional bonds of the same issuer, due to the strong demand for green bonds. This premium, while low, varies significantly over time. For German 10 year debt, for example, it went from 1 basis point (bps) to issue at 7 bps before returning to 5 bps1 . An active manager can exploit this dynamic.
What innovations have you brought to your offering?
Some green bond investors are looking for yield and unconstrained duration management. We have, therefore, launched a more concentrated strategy that focuses on high yield and emerging issuers as there is now an increasing number of green bond issues in these sectors. Alongside this, flexible duration management allows us to navigate through market cycles.
We have also created a strategy on social bonds, which targets issues such as job preservation and access to education. Although this market has grown strongly during the Covid-19 crisis and is over EUR 320bn2 , it remains insufficiently diversified. Our strategy therefore also invests in sustainability bonds (which combine environmental and social projects) and – up to 25% – in conventional bonds from issuers who are well positioned for sustainable development objectives.