A Strong Green Tailwind in the Right Direction

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Stockholm (NordSIP) – Not so long ago, Helena Lindahl, manager of SPP / Storebrand’s Green bond fund, claimed her fund was too small for being the largest UCITS dedicated green-bond fund in the world. As the fund reached its third anniversary and grew assets by SEK 1.2 billion in just one year to SEK 3.7 billion (€360 million), we followed up with Lindahl in a short interview.

Having reached the three-year milestone is often considered an achievement in itself in the asset management industry, as it corresponds to the typical track-record length many institutional investors require before they consider investing. At the same time, Lindahl has more reasons to be pleased. Not only has the fund grown already, and steadily before reaching this three-year threshold, but the fund has also shown better performance than its benchmark in 2017, and it has outperformed its peers since inception.

“We are happy that people are already giving us a vote of confidence. Now that we have three years under our belt, we can showcase that a green bond fund can work,” Lindahl says. When asked what the key contributors to the fund’s performance were, Lindahl remains very modest. One of the factors she mentions is the structure of the fund. “The fund contains very solid holdings with strong financial performance. It is a segment of the market that has performed well recently.”

The expertise of Lindahl and her team, and their ability to navigate the fixed income market have also added a few basis points to performance. “The interest-rate market has been range trading. It was a difficult year, but we have been fairly successful with our duration bets,” she adds.

When it comes to the pricing of green bonds, Lindahl is rather pleased that it has not increased as much as it could have, given the strong demand for this type of instrument. “The demand for green bonds is far beyond the actual issuance. I sincerely think that the market can swallow more. The pricing has kept up with the initial thought behind green financing. Even with strong demand, green bonds trade on the same terms as comparable non-green bonds.”

For traditional investors, this may be counter-intuitive, but Lindahl explains: “There is an understanding that even though large asset managers are very keen to participate, there is a lower limit to the premium that they can pay to get the “green” label. We are all keen to keep this market going, and we don’t want to price ourselves out of it.” Beyond this reflexion is the thought that a fiduciary duty binds institutional investors to their ultimate beneficiaries, which dictates that they select the best available return for any given level of risk. While some believe this definition needs to be revised to integrate sustainability considerations, others argue that sustainability itself should imperatively come along with an opportunity for returns that are at least at par with the market.

In recent conversations, we heard concerns that the growth of the green bond market might stall due to this green premium cap. If the market doesn’t price in the “green”, why should companies choose to issue green bonds instead of traditional bonds, given the additional monitoring and reporting costs green bonds require? For Lindahl, this issue is soon to be resolved. “We have already seen many regulatory changes in the past six months alone. The Task Force for Climate Disclosure (TFCD) is moving at a very rapid pace, and the High-Level Expert Group (HLEG) on Sustainable Finance has issued a strong opinion on green finance. Companies will have to report and disclose what they are doing, and it will become easier for them to do so. Then, if they have to show numbers anyway, they might as well issue a green bond, getting credit and attention for that. This won’t happen within the next few weeks perhaps, but certainly within the next couple of years.”

“The wind is blowing in the right direction,” concludes Lindahl. “And it’s a strong tailwind.”

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