Franklin Templeton is launching Europe’s first actively-managed Euro Green Bond ETF which will be managed by London-based David Zahn, Head of European Fixed Income, and Rod MacPhee, Portfolio Manager, Franklin Templeton Fixed Income Group.
The new Franklin Liberty Euro Green Bond UCITS ETF will provide exposure to bonds supporting projects that are aligned to a low-carbon future and will aim to provide exposure to the European green bond market whilst maximising total returns.
The new ETF will be listed on the Deutsche Börse (DB) on 30 April and subsequently on the London Stock Exchange (LSE), the Borsa Italiana and the SIX Swiss Exchange on 2 May thus joining a strong line-up of nine smart beta and active ETFs within the Irish-domiciled Franklin LibertyShares UCITS ETF range.
Caroline Baron, Head of ETF Sales EMEA, says: “Demand is rising in Europe for high conviction ESG products due to increasing investor and regulatory pressure to incorporate green, ethical and governance factors into investment portfolios. While traditional passive ETFs continue to grow in popularity, we believe that with securities such as green bonds, an actively-managed ETF vehicle that offers full transparency, flexibility and tradability can add value and insight to investors. With this new addition, we are excited that the Franklin Liberty Euro Green Bond UCITS ETF, which is priced at 30 basis points, will further complement our existing active management ETF range.”
The Franklin Liberty Euro Green Bond UCITS ETF will invest at least 70 per cent of its net assets in green-labelled bonds, with the balance made up of unlabelled bonds which are climate-aligned, i.e. bonds that are not labelled as green but are nonetheless financing solutions that contribute to a low-carbon future while at the same time reducing their own carbon intensity will be deemed to be eligible. By investing in this manner, this new active ETF expects to provide liquidity to new and existing climate-aligned projects with environmental benefits.
Zahn says: “In periods of risk aversion, green bonds exhibit lower volatility as investors tend to hold on to these bonds. Our data indicates that in both the primary markets and secondary markets, 72 per cent of green bonds had tighter spreads than ordinary bonds after seven days, and 62 per cent were tighter after 28 days respectively. We believe that active management gives us the best opportunity to benefit from these pricing opportunities. As for unlabelled green bonds, we think this universe offers compelling opportunities that are less well-known than their labelled green counterparts because there is comparatively less demand.
“As an investment team, we think it is important to use our position to push for accountability and hence we will require all issuers in our portfolio comply with a baseline level of environmental impact reporting regardless whether the issue is labelled green or held in the portfolio.”
The investment team will employ a fundamental, bottom-up credit analysis on corporate bonds, while drawing from Franklin Templeton’s proprietary ESG model on sovereigns. While the focus will be on eligible green bond securities, each investment will be subject to internal credit approval. The issue selection process and other actively-managed techniques such as sector allocation, duration and curve management will be utilised in order to enable the Fund to outperform the Bloomberg Barclays MSCI Euro Green Bond Index.
Since the first issuance in 2007, Europe has remained a cornerstone in the global green bond market, with cumulative issuance totalling EUR165 billion. “Green” refers to how the proceeds of the bond issue will be spent, typically a promise to use the proceeds to finance or re-finance, in part of fully, new or existing sustainable projects. Green bonds generally offer a fixed return and are most often issued by financial institutions, governments or companies in accordance with the Green Bond Principles (GBP) – a voluntary set of principles that promote transparency, disclosure and integrity in the green bond market.