Going Green: ESG Fixed Income Investing for Global Markets

For over a decade, Christopher Wigley has been at the forefront of ESG fixed income investing. He was also one of the first to invest in green bonds back in 2008. In this interview, he shares his views on the maturing of the global green bond market and takes a look at the growing importance of measuring carbon impact in portfolios.


How has the supply of new green bonds been in 2017?
It's an interesting time. We've been seeing a very strong market in terms of green bonds issuance in 2017. Usually the summer months are a quiet time of the year where we don’t see too much issuance. But in 2017, issuance never let up. In fact, the Climate Bond Initiative estimates that the total amount of green bonds issued in 2017 could reach $130 billion. By comparison, 2016 issuance was a little over $81 billion.1

Also, issuance this year has been across different currencies, not just euros and US dollars but also in sterling and Australian and Canadian dollars. And it has spread across different types of issuers, from multilateral development banks such as Asian Development Bank, corporates such as UK utility firms Anglian Water and Scottish and Southern Electricity Networks, as well as Toronto Dominion Bank in Canada.

Do you see this diversification of green bond issuers as a lasting trend?
Certainly. What's been interesting in the last 12 months is that in addition to multilateral development banks and corporations who issue green bonds, we are now seeing sovereigns join the market. Poland was the first sovereign to issue a green bond, back in December 2016, and this was followed by France in January of 2017. In fact, France has now issued the largest-ever green bond of 8.5 billion euros.

We know that sovereigns in other regions are working on new issues, as well. We think there is a lot of potential in Asia where climate change is particularly acute. We see interest in Malaysia and Thailand to issue green bonds for certain projects that address the challenges of climate change. More broadly, we think governments across emerging markets in Asia and Latin America could be some of the biggest sellers of green bonds in 2018 and beyond. And because yields on green bonds sold by emerging market government issuers will likely be higher than similar paper issued by European sovereigns, they could be appealing to investors seeking greater income. To clarify, the higher yields would not be due to the green factor, but rather the rating of the issuer. Credit ratings of issuers in these emerging countries tend to be lower due to increased levels of risk including default, political and economic risks.

Do you think climate change is the key driver of growth worldwide?
First of all, I believe this continuous uptick in new issues and the size of the bonds demonstrates that countries are serious about following the Paris Climate Agreement. They are taking their commitment to limiting global warming to two degrees Celsius (3.6 F) or lower very, very firmly.

Also, I believe supporting the energy transition to a low carbon world has become a priority of governments and corporations globally. Estimates by the International Energy Agency (IEA) point to a $3.5 trillion average annual investment need worldwide in low-carbon energy technologies and energy efficiency until 2050 to achieve a low carbon world.2 Green bonds are one type of new investment that can help finance a radical transformation of the energy mix.

It is also interesting to note that President Trump was elected a year ago. But states such as New York and California are more committed to sustainability – as we see in terms of green bond issuance. So the US continues to be an important player.

Can you expand upon the energy transition under way?
Well, there is a growing demand for energy led by emerging markets. In fact, the world energy demand has more than doubled during the past 40 years, according to the International Energy Agency.3 This has been driven mainly by population growth, urbanization, and a rising middle class in emerging markets. Going forward, the IEA believes energy demand from emerging countries should grow fourfold by 2050 from 2010, when consumption of energy per capita catches up with developed countries.

So clearly, we need to move to low carbon energy sources. When it comes to fighting climate change, I think it’s the $100 trillion global bond market that can do the heavy lifting. This is where green bonds become an important player.

Do you see measuring the carbon impact of a portfolio growing in importance?
It's becoming very important. Because in this environment, where global warming is increasing and having impacts in terms of extreme weather, for example, investors really want to know what their investments are doing. I think this is particularly true with Millennials. In fact, this sentiment was captured in Natixis’ Global Survey of Individual Investors, with 75% of Millennials saying they want to invest in companies that make a positive social impact – and are worried about the environmental records of companies in which they invest.4

More and more investors want to know what the actual investments in portfolios do to fight climate change. Measuring the carbon impact of the overall portfolio allows us to provide this information. In fact, it is now the law in France that sustainable asset managers have to report the carbon footprint of their portfolios. At Mirova*, in combination with our partner, Carbone 4, who are carbon and climate specialists based in Paris, we've developed a carbon measurement and reporting methodology. This was rolled out for green bonds in April. As a result, we can release significant data in terms of green bonds. There are now ways to measure whether or not a green bond portfolio is consistent with a plus-two degree world or less. We believe this is important information, especially compared to mainstream bond indices which may be consistent with a plus-four degree world.

Are you seeing issuers reporting more impact details?
We are receiving more sophisticated impact reporting for sure. In the early years of the green bond market, issuers would outline the amount of greenhouse gas emissions that might be reduced by the issuance of a green bond. So we have had environmental impact data since 2008. But now there are social impacts reported, as well. For example, issuers may say, “We’re financing renewable energy, but by financing renewable energy, we are also creating jobs.” So I think we are getting more and more insightful information from issuers.

Overall, that is one of the unique things about a green bond versus a traditional bond. Not only do issuers disclose the use of proceeds, but also they often provide, on an annual basis, impact reporting.

 

Christopher Wigley is a Senior Fixed Income Portfolio Manager at Mirova*.

Christopher Wigley began his career in 1987 with the Mitsui Bank in London, managing the bank’s investment portfolio primarily in US treasuries, US mortgage-backed securities, corporate bonds and high yield bonds. In 1996, he joined Aioi Insurance Company of Europe as the Investment Manager responsible primarily for European government bonds, corporate bonds and European branch investments. In 2004, he became the Senior Fund Manager at Epworth Investment Management, a specialist in ethical investment. There Chris was responsible for all the fixed income portfolios including government bonds, inflation-linked securities and corporate bonds. Chris has been a specialist in ESG Fixed Income and Green Bonds for ten years. He joined Mirova in 2014.

Chris is a graduate of the University of Essex in England. He is also a Chartered Wealth Manager and has 28 years of professional fixed income investment experience.