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Active Thinking

At GAM Investments’ latest Active Thinking forum, Atlanticomnium’s Romain Miginiac discusses the growth in the European financials green bond market, where he believes the potential opportunities can be found and the importance of robust methodology when measuring environmental impact.

06 July 2022

Romain Miginiac, Head of Research & Fund Manager, Atlanticomnium

We continue to think it is currently a good opportunity to invest in the green bonds of financials. The heavy headwinds of higher rates and inflation will likely put pressure on many corporates, with higher financing costs and higher input costs; however, banks benefit from higher rates as it boosts their profitability. As an example, for 100 basis points (bps) of rise in rates, HSBC is projected to boost its net interest income by USD 5.4 billion in the first year, rising to USD 7.5 billion1 in the third year. Despite the prevailing uncertainty, we think financials are well placed to absorb any kind of economic slowdown. During Covid we saw excess capital increasing and banks remaining profitable; with the tailwind of higher rates, the capacity to absorb a rise in loan loss provisions should be high. Even in a negative scenario, we are optimistic banks will likely remain profitable, and consequently excess capital to likely remain unscathed.

With spreads on investment grade financials at relatively high levels, the market is offering unique opportunity. We believe subordinated debt has benefits over traditional senior debt in its ability to generate long-term outperformance without taking on extra risk, with a pick-up in spread or yield for the same rating and duration.

The European financials green bond market has been growing at an exponential rate since its inception in 2015. In 2021 there was a record issuance of more than USD 50 billion – taking the market to around USD 110 billion. This has been further increased by another USD 25 billion in net issuance since the start of 2022, and we anticipate the market to be above USD 200 billion by the end of 2023,2 creating several potential investment opportunities. This is important; a common concern regarding European financial green bonds has been the size of the market. The rapid increase in market size and strong issuance pipeline provides a sizeable universe of issuers and green bonds for us to apply our investment decision framework to them without running into capacity constraints.

A focus on European financials can be misleading in terms of global reach of the strategy. While the geographic and sector focus could be viewed as niche, they actually can offer a broad range of projects globally; for example French bank Crédit Agricole finances projects all over the world, beyond France and Europe. Additionally, green bonds of banks support SME (small and medium enterprise), individuals and other corporate and institutional clients. By aiding in the transition of smaller companies that lack access to capital markets and rely on bank lending and advisory services to support their environmental strategy, it is possible to access projects that could otherwise be out of reach by buying corporate green bonds, in our view.

When exploring the environmental impact of a green project, we believe it is important to use a robust and consistent methodology and set of assumptions. It can, for example, be easy to understate the carbon emissions of a project such as a renewable energy farm, if only accounting for ongoing energy production that has no carbon emissions. We include carbon emissions throughout the whole lifecycle of the project (including construction, maintenance, transport, etc.) in the overall assessment of the project, which allows a more detailed assessment of carbon emissions avoided by the project.

The ultimate goal of lowering emissions and creating a more environmentally friendly planet is the reduction of global temperature increases. We believe this can be achieved at least in part by considering strategies which have a temperature alignment.

We also believe it is pivotal to engage with issuers as part of the investment process in order to get an insight into their sustainability goals. One way we assess this engagement is through an issuer’s net zero commitments, looking at whether they are set in an achievable timeframe, if they have the expertise to achieve these targets, and overall what their pathway to net zero entails. Alongside looking at net zero commitments, it is also important to analyse governance and accountability; whether issuers have the right supervision mechanism and the right governance in place to give investors confidence on their strategy. Finally, we view risk assessment and reporting as a strong engagement factor, with clear disclosure on climate vulnerabilities of the issuer.

1 Source: Company document, HSBC’s annual report 2021, as at 5 July 2022
2Source: Atlanticomnium, Bloomberg
Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.

Romain Miginiac

Fund Manager & Head of Research at Atlanticomnium SA
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