Greening Fixed Income markets: a challenge of today and tomorrow
Monday 07 October 2019
ESG, Fixed income
Policymakers continue to implement comprehensive strategies to fostering sustainable finance. Most notably, in March 2018, the European Commission adopted its action plan resting on three pillars: (i) re-orienting capital flows towards sustainable investments; (ii) managing financial risks stemming from climate change; and (iii) fostering transparency and long-termism in financial activities.
Carbon pricing at the roots of the debate
In a 2016 paper, William Nordhaus, the 2018 Nobel Prize recipient, wrote that while there is uncertainty on the path of climate change and its impact in the future, this does not reduce the urgency of taking strong climate-change policies today1. Indeed, he mentioned in a recent speech2 three key actions for organizations, companies and financial institutions to undertake for an efficient fight against climate change:
- Carbon pricing: today, the price of CO2 emissions is zero $ almost everywhere in the world, and when it has a price, it is not an accurate one. Without high prices on carbon emissions, none of other policies nor actions will be effective. It is certainly the largest issue to solve.
- Environmental science: to understand climate change, government and institutions need to promote environmental science and innovation on that field.
- Long-term investment: companies need to assess their carbon footprint and risks associated in a forward-looking business scheme. They need to lengthen their time horizon.
The financial industry has a clear role to play in channeling capital to the relevant sectors, actors and projects. They can direct them in such a way that each player follow good practices. In particular, ‘greening’ fixed income markets, the largest source of financing, will be critical if the financial sector successfully embraces the Paris climate agreement goals.
Institutional issuers: the question of yield and additionality
However, there are two major obstacles for fixed income investors seeking to invest in green and sustainable solutions: yield, and additionality.
Indeed, the green bond market is concentrated on supranationals, sovereigns or large utilities. Therefore, two problems may occur:
- Problem of yield: these issuers are mostly investment grade, and in developed markets.
- Problem of additionality: these actors already have access to markets to finance their green activities. For instance, the European Investment Bank (EIB) commits to allocating more than 25% of its lending for climate action, a target that it has already reached3. Whether they finance these projects via a normal bond or a green bond yields little for investors seeking to have a real ‘additional’ impact.
New frontiers to set in the green bond market
To address these obstacles, new frontiers of green finance are to be set:
- A geographic frontier: in emerging markets, more yield and additionality can be found.
- An issuer frontier: both public (channeling funds to sub-sovereign entities such as cities), and private (new economic sectors: energy efficiency) sectors are to play the game.
- An instrument frontier: high yield bonds, private debt, and unlabeled green instruments have to be designed.
Amundi partners with key players to answer these issues, employing a holistic approach. First, stoking the demand side of green markets by launching dedicated debt funds. Second, supporting the supply side of these new fixed income instruments via the definition and dissemination of best practices and standards for these nascent segments. These can be done via Scientific Committees incorporated within these programs, the publication of research pieces, technical support to issuers etc. And third, working hand-in-hand with leading institutions, to boost the depth and breadth of the innovations.
 William D. Nordhaus, “Projections and uncertainties about climate change in an era of minimal climate policies”, NBER Working Paper Series, 2016.
 Amundi World Investment Forum, William D. Nordhaus keynote speech available here
 Source : https://www.eib.org/
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Investing in social bonds: factors and benefits
Over the past years, the global investor community continued to integrate risks related to climate change into investment decision making. Such a level of mobilization has yet to materialize for the consideration of social risk.
Bond back to Core: where is the value in the current economic cycle?
“Slowdown in global growth with subdued inflation and dovish Central Banks (CB) committed to avoid further economic deceleration are trends that should remain favourable for bond investors.” begins Eric Brard, Head of Fixed Income at Amundi. “On one side, investors should limit the upside in core bond yields and, on the other, support the credit market, despite the strong spread compression in this first part of the year. An increasingly selective approach will be crucial.”
Bridging the gap between quantitative and fundamental approaches
Bonds market faced low rates since many years. And they probably won’t rise up soon.Clients’ needs for diversification and current market conditions (in addition to low rates, i.e. increase of bonds issuers) drove the path towards new solutions engineering. “Listening to our clients, observing the market and experiencing our econometric models were keys when building this new range” says Jean-Marie Dumas, Head of Fixed Income solutions at Amundi. “High yield laid behind us. We had to provide a serious alternative to traditional judgmental fixed income strategies” he adds.