The better bond.
Green Bonds. Increasingly, governments and companies are issuing bonds to finance "green" projects. This is interesting for investors for two reasons. "Capital has a positive effect, and with the right selection, the risks in the portfolio can be reduced," explains Bram Bos, NN Investment Partners.
"Let us assume that there is no price difference between organic products and conventionally produced food. What would you buy?" asks Bram Bos, portfolio manager of the NN (L) Green Bond Fund. The overwhelming majority would go organic. "And that's why I'm sure Green Bonds - green bonds - have a great future."
"In terms of yield, liquidity and also average credit quality, there are no significant differences between Green Bonds and other bonds. Interest rate paper is interest rate paper," explains Bos, "but what is decisive is what happens to the capital that the issuer receives from investors." With Green Bonds, it has to go into projects that have a positive impact on the environment. And the issuer must report on this transparently and regularly.
"Precisely because people have become more aware of the negative consequences of climate change, this is becoming increasingly important. You can, for example, replace traditional bonds with the green papers of the same borrower and thus make a statement," explains Bos.
This is well received. The market is developing correspondingly rapidly. "It has even received a further boost from the Corona pandemic, as more capital is now flowing into green projects," Bos notes.
This year, he estimates that green bonds with a volume of around 200 billion euros will come onto the market. It will then be worth 700 billion euros. And the next quantum leap is expected next year. This is because the European Union will issue bonds to finance its EUR 750 billion coronavirus economic stimulus package - about a third of which are expected to be green bonds. "This means that the market, which is about two-thirds euro-denominated and has a comparatively high proportion of corporate bonds, offers us fantastic choices.
This selection at issuer and project level is the most important task of fund manager Bos. "The objectives pursued are not always truly sustainable. Some people also do simple greenwashing, put on a green coat for marketing reasons. Still others are not transparent or do not provide sufficient information. We sort them out with a vengeance. In total, around 15 percent of the bonds designated as green are thus removed from our investment universe."
At the same time, Bos and his colleagues also check the issuers. "They must have an above-average ESG rating and, of course, they must also not be involved in any controversy." He is supported by an independent Responsible Investment Committee. "In this way, we can be absolutely certain that we only have issuers in our portfolio who take climate protection really seriously," says Bos. "If, for example, an airport operator issues a Green Bond to finance green buildings and zero-emission passenger transportation on the ground, but on the other hand is working on expanding the airport and thus basically paving the way for more emissions - then that's not right.
A positive example, however, is a green bond issued by a German energy company. "The company plays a leading role in the energy turnaround in Germany and is involved in areas such as wind farms, charging stations for electric cars and the construction of power lines for the distribution of renewable electricity. This is why the emitter and its request for a CO2-poorer future seem credible to us," explains Bos.
Thanks to this stringent selection process, Bos is convinced that he can also reduce the risks in his portfolio. "Issuers with poor ESG ratings are generally more vulnerable. Sei it that, for example, the company management is not right, i.e. the G for governance. That business models are endangered by regulatory intervention. Or that there are oil and gas reserves lying dormant in the balance sheets, which in the future may no longer be worth what they are accounted for today," the expert enumerates and concludes: "It is better not to own their bonds in the first place.
The expert even sees a small, additional yield opportunity in the coming months. "The demand for really green bonds is increasing. The ECB could also acquire green bonds in the future as part of its bond purchase program. That could drive prices up," says Bram Bos and smiles: "That would almost be like offering organic products at lower prices than conventionally produced ones. Which would you buy?" ®
// How to invest - in Green Bonds.
NN IP, the asset manager of NN Group (the largest Dutch life insurance company), has been investing in Green Bonds since 2016 and currently offers three Green Bond funds: The NN (L) Green Bond Fund (ISIN: LU1536922468) invests globally in government and corporate bonds. A variant of the fund with short interest rate sensitivity, "Short Duration", has been available since 2019 (LU1922483455). Finally, the NN (L) Corporate Green Bond Fund was launched this year (LU2102358509), which invests exclusively in corporate bonds. All three funds only invest in bonds denominated in euros.
The NN (L) Green Bond Fund, like the entire green bond market, was able to recover from the slump in the spring of this year and, according to Morningstar, has been up 4.21 percent since the beginning of the year (as of 06.11.20). Since its launch (as of 31.10.20), it has outperformed the Morningstar Category Index by 0.27 percentage points with an average annualized return of 3.89 percent. Investors are also kept regularly informed through regular reporting about how much CO2 the fund saves by financing green projects, how much energy is generated sustainably and which sustainability goals of the United Nations are promoted through this.
In addition, the fund company provides information on how the management is trying in the discourse to persuade issuers to behave even more sustainably.
NN Investment Partners
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