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Investors Need a Better Green Filter

The firm has a checklist to help investors determine the green credentials of fund managers.

  • Joe McGrath

Investors need better ways of evaluating a fund manager’s green credentials or risk being seduced by investment strategies dressed up as environmentally-friendly.

Consultants should ask whether firms are “walking the walk,” said Noel O’Halloran, chief investment officer, at KBI Global Investors. He has a checklist of considerations before a fund may be deemed truly environmentally aware.

Investors should ensure firms are signatories to the United Nations’ Principles for Responsible Investment, ask to see their annual submission, and explore the external organizations with which they have relationships, according to O’Halloran.

His comments come ahead of the International Capital Market Association’s annual Green Bond Principles conference in Paris on June 14. Green bonds – which aim to produce returns from environmentally friendly investments – have fallen under scrutiny as financial firms seek to justify their inclusion in their environment funds.

France leads Europe in the sale of green bonds with $31.3 billion outstanding at the end of last year, followed by Germany with $17.7 billion and the Netherlands with $12.2 billion, according to a report last month from the Climate Bonds Initiative.

Dutch bank DNB warned in a paper earlier this year that the growing appetite for green bonds could be a trigger for firms to profile investments as “green” even when they are not. DNB noted vast differences in how countries treat green bonds, citing China as an example where “clean coal” companies can be financed by them.

The “absence of generally accepted definitions and criteria” to assess whether bonds are green hampers the credibility and the development of the market, DNB said in the report.

Collaborative engagement is key to verifying a fund manager’s green credentials, according to O’Halloran, who said that involvement with the Carbon Disclosure Project, the UK Stewardship Code, the CDP Water Initiative, and the Institutional Investors Group on Climate Change, add creditability to an investment firm’s commitment.

Mark Carney, governor of the Bank of England, has called for faster development of the green-bond market to assist in reducing climate change risks for the world economy. “The development of this new global asset class is an opportunity to advance a low carbon future while raising global investment and spurring growth,” he said in a speech in Berlin in September, as reported by Reuters at the time.

Britain has just $1.2 billion of green bonds outstanding, according to the Climate Bonds Initiative report.