What are green bonds?
Green and social impact investing involves purchasing bonds where the proceeds are earmarked for projects which support a low-carbon economy or the basic needs of underserved populations and communities. They help finance a myriad of initiatives, including renewable energy, pollution prevention, access to healthcare, affordable housing and female empowerment.
The green bond market was born in 2007, when the first green bond was issued by the European Investment Bank (EIB)1 . Since then, it has developed very rapidly, counting supranational bodies, corporations, financial institutions, administrations, and public entities and governments among the issuers. In just a decade, green bonds have grown to become a significant international market, attracting the attention of investors engaged in the decarbonisation of assets.
Today, there is still no standard for green bonds. The International Capital Markets Association (ICMA), however, has established the Green Bond Principles, a set of guidelines made available to green bond issuers emphasising that the proceeds from these bonds must be used for projects that are of environmental interest and stressing the importance of transparent reporting.
Why consider investing in green bonds?
The green bond universe has changed significantly since the first issue in 20071 . The 2015 Paris Conference on Climate Change (COP21), which set in motion the transition to a low-carbon economy, was a defining moment in this regard. Since then, a series of regulatory changes have been initiated, resulting in increased investor awareness of environmental issues. Green bonds have clearly benefited from this global commitment and the investment universe has grown.
As a result, green bonds have increasingly attracted the attention of investors engaged in the decarbonisation of their assets, due to the objectives set by the Paris Agreement On the one hand, the issuer attests to their commitment the energy transition. On the other hand, there is more transparency as issuers undertake to publish an annual report setting out the evolution and impact of the financed projects.
As the green bond market grows, the list of issuers, regions and sectors is becoming increasingly diversified. This growing diversification along with a good balance between private and public issuers now enables the universe to offer a potentially attractive risk/return profile, making it an alternative to the conventional bond universe.
Green bonds can provide a transparent tool to finance environmentally-friendly projects at no additional cost. The price of a bond normally reflects the financial risk associated with its issuer – the same applies to a green bond. So, there is no justified structural difference in terms of issue price or financial performance between a green bond and its traditional equivalent.
Our green bonds strategy
At AXA IM, our green bonds strategy is a purist approach which combines our extensive resources in global, active fixed income investing with our proprietary green bond framework and our Environmental, Social and Governance (ESG) process2 . Not all green bonds are equal, and it is essential to have a rigorous approach to ensure a real environmental benefit and avoid supporting any ‘green-washing’3 . At AXA IM, we have developed our own framework for assessment. This framework not only drives responsible investments towards green projects but also looks to raise the standards of the whole market. Our analysts meet many issuers to discuss their businesses and to explain our framework. We also often use these opportunities to engage the issuers by sharing market best practices and areas where they can strengthen their sustainable financing approach. Our goal is to highlight what we expect from them in terms of their issuance, and if necessary, help them improve their broader sustainability related strategy.
- The ESG data used in the investment process are based on ESG methodologies which rely in part on third party data, and in some cases are internally developed. They are subjective and may change over time. Despite several initiatives, the lack of harmonised definitions can make ESG criteria heterogeneous. As such, the different investment strategies that use ESG criteria and ESG reporting are difficult to compare with each other. Strategies that incorporate ESG criteria and those that incorporate sustainable development criteria may use ESG data that appear similar but which should be distinguished because their calculation method may be different.
Our green bond framework
Using AXA IM’s green bonds framework, we seek to invest only in those green bond projects which provide a material benefit to the environment. The aim is that only the most relevant and impactful projects receive the necessary financing.
Our proprietary framework is composed of four pillars for choosing an investment:
- Does the green bond fit with the bond issuer’s environmental objectives?
- Will the project have a clear impact beyond the issuer’s business as usual?
- Do we know that the proceeds will finance what they are supposed to?
- How does the issuer plan to track the progress of the project and measure impact?
We focus on bonds which provide benefits in one of four key environmental themes:
- Smart energy solutions
- Low carbon transportation
- Green buildings
- Sustainable ecosystems
We aim to provide transparent and measurable impact metrics focused on UN Sustainable Development Goals4 contribution towards environmental and societal issues, including:
- Good health and well-being
- Decent work and economic growth
- Sustainable cities and communities
- Climate action
Our ACT range is designed to take action on global issues such as climate change through their investments. These strategies go beyond ESG integration, either following a process in which investment decisions are driven by ESG themes or seeking out intentional, positive, measurable and sustainable impact.
No assurance can be given that our Green Bonds strategy will be successful. Investors can lose some or all of their capital invested. The Green Bonds strategy is subject to risks including counterparty risk, geopolitical risk, liquidity risk, credit risk and currency risk. Investments may be affected by movements of foreign exchange rates, changes in laws or restrictions applicable to such investments, changes in exchange control regulations or price volatility.
Our responsible investing approach
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