Brian Kinney, senior portfolio manager for the fixed-income team at $2.1 trillion State Street Global Advisors, is excited about green bonds not because he believes he’s found a great green investment option for his clients; he simply believes he’s found a great investment option.
Green bonds, which allow investors to earmark their investments for climate-friendly projects ranging from reforestation efforts to clean technology development, appear to be on their way to attracting a critical mass of investor interest. In the past year and a half, the nascent market has grown from $1 billion to $5 billion, according to Christopher Flensborg, the banker from Stockholm-based SEB who pioneered the green bond concept. Of that total $5 billion, a slice of roughly $2 billion represents green bonds issued by the World Bank, Flensborg says.
Kinney has found that investors interested in ESG (environmental, social and governance) themes are not the only ones who are eager to learn more about the green bond. He points out that with the overall universe of high-quality fixed-income investments shrinking, all types of investors are looking for new bond offerings that fit that particular bill – which, he adds, green bonds very squarely do.
Institutional Investor reporter Katie Gilbert recently spoke with SSgA’s Brian Kinney about green bonds, and why mainstream investors like him are taking a closer look.
What first spurred your interest in green bonds?
SSgA is constantly looking for new ways of looking at the market to be able to deliver compelling investment strategies to our investors. One thing that has crossed our desks over the past year or so has been this relatively new concept of bonds that are used to finance green projects and are sponsored by IFIs [international financial institutions, like the World Bank]. So we began doing some investigative work around this new type of bond. We began to talk to issuers and started to do your basic asset management due diligence around green bonds and are continuing to look at how green bonds might play out in a fixed-income portfolio.
How, specifically, will SSgA be working green bonds into its investment product offerings?
I can’t comment specifically on any strategy that we have under development. What I can say is that we have had conversations directly with past issuers of green bonds and prospective issuers of bonds that have a similar approach and construction. We are looking into ways of fitting those into existing strategies, or creating specific strategies as they relate to this concept. But we do not yet have anything that we can officially comment on or discuss.
So anything to do with green bonds at SSgA right now is under development, and under wraps.
Yes, but we’ve done more than cursory development work. We hosted a summit back in February to bring together asset owners, asset managers, issuers, rating agencies and academics to talk about expanding the field and figure out different ways bond investors can gain access to green finance.
That was very well received. We were heartened by the response. As a matter of fact, we had such overwhelmingly positive feedback from that event that we’re hosting a follow-on event a similar invitee list on June 29 in London.
All of these factors have gone into us continuing to expand our level of interest and doing more investigative work in terms of what may be possible in terms of implementing a strategy, because we do think that clients are going to be asking – and are already asking – questions about ways of expressing either ESG views or views on supporting green initiatives in their bond portfolios.
It’s an area of development in the bond market that’s in its very early stages. We want to be thought leaders in this space at the very least. We want to be able to create forums to talk about what’s possible here, and right now we’re in the formative stages of looking at those possibilities, creating venues to be able to discuss and analyze those opportunities and we are committed to moving forward and working on delivering something of value to our clients.
Why do you think investors are showing so much interest in green bonds?
There are a couple of reasons. We think that these green bonds, especially the way the international financial institutions have approached them, are bonds that stand on their own investment merit, which is most important to us.
They’re of high credit quality, they’re coming from reputable issuers of large scale that are backed by large balance sheets and known institutions. For that simple reason, before you even get into the green components of it and the value of the “greenness,” we think that is a good reason to be looking at this option for our clients.
We do have a sense that it’s something that there’s a shadow demand for, that there are more and more investors that are being asked to consider sustainability and environmental factors in their approach to the market and investment philosophy. For all those reasons, we think that the relative attractiveness or the opportunity in green bonds may be something that will be attractive to our clients.
Can you expand on what, exactly, you mean when you say green bonds stand on their own investment merit?
The way that they’re structured doesn’t ask investors to make critical tradeoffs of return that some other investments might in the ESG space. In other words, they have a high credit quality, they’ve been issued at levels that are competitive with levels of other bonds that don’t hold a green label, they’re issued by very large and reputable firms that know what it takes to put together a good bond deal. They’re very high quality. The liquidity question is one that I think is yet to be tested, but on most of the factors that we look at when considering bond analysis, green bonds do stand up nicely in terms of being an attractive, high-quality bond offering.
So does that mean you’re seeing interest in green bonds coming from investors with an ESG angle as often as you are from investors looking only at the financial merits?
Yes, I think it’s both. There are pension funds and entities around the globe that have an ESG focus and who find it attractive for its green factors.
In a more macro sense, the world of investible AAA securities is shrinking, the GSEs and agency debentures are shrinking as a percentage of the investible universe, and we don’t know what is going to happen with agency mortgage-backed securities, and we know that the number of corporate issuers with a high credit quality has diminished over the past couple of years. But we think there is still a large swath of investors that are looking for high credit quality bond returns in the AAA bucket, and they’re looking at a smaller and smaller universe.
That alone gives you reason to want to look at different options for your investors that meet those specific requirements.
What needs to happen to scale up the green bond market?
I think there needs to be more education as to what investment options are out there, and what risks are present in those investment options for investors to make a critical mass. We think there needs to be a more open forums for investors and issuers and stakeholders in general to be able to get together and discuss where some of these “ESG factors” intersect with traditional financial factors, and how financial instruments could be rethought to meet broader objectives.
I think we’re in that time now, and I think that through education you get broader market attention and with broader market attention you get, hopefully, more demand. You get greater participation from the sell side, you get financial innovation and, finally, you get scale. I don’t know how far into that game we are now, but I think that’s what’s beginning to play out.
You’re the senior portfolio manager for the fixed income team at SSgA – you’re not necessarily constrained to the ESG space. So you didn’t initially come at this from the ESG angle, did you?
Personally, this is my first foray into looking at a bond investment concept that could be characterized as ESG. That’s probably why I look at it from a slightly different angle, which is first looking at the opportunity through the lens of an institutional investor who doesn’t have an ESG goal in mind.
State Street has been one of the larger ESG managers in the institutional space. But I think this is a bit of a chicken and egg: The market for ESG options – outside of positive and negative screening – just hasn’t been there for bond investors in the past. So I don’t think you’ll find many shops where there’s a dedicated ESG portfolio manager on the fixed income side. The likely course is that if and when you see growth in this area, you’ll see more “mainstream,” non-ESG fixed-income managers as the ones who will be looking at, investigating and doing research around potential strategies there.
