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Keep it green, but keep it clean


This week’s column from Algo-Chain’s Allan Lane looks at the evergreen popularity of ESG investing…

It looks like the ‘Summer of 2019’ will go down in history as the time when ESG investments tipped into the mainstream. Notwithstanding the fact it has been 13 years since the launch of the first sustainability screened ETF in Germany, it’s good to see the launch of the Franklin Liberty Euro Green Bond UCITS ETF list on the London Stock Exchange recently, listed both in EUR and GBP.

With an annual management fee of 0.3 per cent, this accumulating fund currently comprises 28 ‘Green’ bonds and 13 ‘Climate-Aligned’ bonds.  These are all EUR denominated, mainly issued by European Financial Institutions, Treasuries & Agencies, with over 80 per cent holding a credit rating of A or above and at the time of writing the portfolio has a weighted average duration of 7.35 years.  The bonds are chosen from the Bloomberg Barclays MSCI Euro Green Bond Index. Amongst other rules for the ‘green stamp’, a security’s proceeds must fall within at least one of eligible environmental categories, which are alternative energy, energy efficiency, pollution prevention and control, sustainable water, green buildings, and climate adaptation. 

There has been a lot of noise lately from many commentators suggesting that Fixed Income ETFs comprise the next big growth area. What is driving that view is up for debate, but my money would suggest that on the supply side, many ETF issuers are looking to extend the success of Smart Beta Equity products to the Fixed Income space.  Whereas from an investor’s point of view, themed ETFs offer far more appeal than the ‘featureless’ propositions of the monochrome large cap index products.

According to the Climate Bond Initiative group, in Q1 2019 as new entrants entered the fray, the new issues market in Green Bonds pulled in close to USD50 billion.  While there is much debate as to what qualifies a bond to be deemed worthy of the truly green accolade, one cannot escape the simplicity and appeal of this way of bringing capitalism in line with the needs of environmentalism.  

From a pure investment perspective, one should see this product as nothing more than a basket of investment grade bonds.  Franklin Templeton have somewhat surprisingly chosen to manage the ETF as an active portfolio and will not track the Bloomberg Barclays MSCI Euro Green Bond Index, which currently covers 50 bonds, and constitutes the universe of eligible bonds.  Why they have done this is, is not so clear, but such an approach allows the fund manager quite a lot of wriggle room to tactically buy and sell the bonds at their discretion.  As this market grows, let’s hope the ratings agencies, make a better job of understanding the hidden risks that come with this popular sector, and avoid the mistakes and bad practices that came hand in hand with the off-the-scale growth numbers that came with the Collateral Debt Obligations bubble.


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