ESG Investing Awards 2022: Winner of Best ESG Investment Green Bonds Fund

We speak to Matteo Merlin, Head of Green and Sustainable Finance and Caterina Ottavi, Fund Manager, Green and Sustainable Finance at Eurizon.

What are the main liquidity issues with issuing and investing in green bonds?
The main trading issue with green bonds is the “greenium”. When considering green government bonds, for instance, at the time of launching they carry a negative premium by around 4-5 basis points. However, this “greenium” testifies the strong investors’ demand for this category of securities, as well as a shortage of supply.

Also, investors are increasingly willing to accept lower return on investments, considering a priority the fact that these products are tied to climate change. In the corporate component, the financial sector has a good ratio of Green Bonds among Green Assets, that outlines a large margin for banking issuers to issue green assets. In general, an increase in the number of actors and issues per issuer may lead to greater efficiency in terms of pricing, and therefore to a reduction of the “greenium”.

On the secondary market as well, green bonds may show an effect on pricing due to the shortage of assets, as the green market is still small in size when compared to the other markets, and to the government security and corporate investment grade markets in particular. Climate Bond Initiative analysts expect the market to grow in size to USD 5 trillion by 2025. Dimensional growth will reap positive effects on the trading of green bonds.

To what extent is greenwashing/lack of enforceable standards a problem for the green bond market?
For what concerns fighting greenwashing, steps forward are being made in Europe with the EU Taxonomy and the formalisation process of the EU Green Bond Standards. Formalisation of an environmental classification is aimed at creating a common European language to protect investors, businesses and central banks from greenwashing.

However, it is interesting to point out that the increasingly well-defined rules to support the transparency of the green market is pushing some issuers to issue SLBs (Sustainability-Linked Bonds). This could negatively impact the growth of the market, at least in part, albeit not its greater transparency.

Are green bonds associated with greater credit risk?
No, there are no differences between conventional investment grade bonds and green bonds. During recent market movements in January and February, guided by the changes in central bank policies and by the Russia-Ukraine crisis, the movements of green bonds proved to be in line with those of non-green bonds of corresponding seniority.

As a bond investor, to what extent can/do you engage in active stewardship with the companies/countries you invest in?
The investment management team constantly pursues engagement activities with companies and governments that issue green bonds, both during the launch phase and over the years after the issue date. We believe this is an important activity in signalling the point of view of the green investor, and make the issuer aware of potential improvements, especially in terms of disclosure and information standardisation.

Participation in the shareholders’ meetings of the investee companies allows Eurizon to shape, through its vote, corporate and/or sustainability themes related to the companies. During 2021 Eurizon Capital SGR took part in 160 shareholders’ meetings of selected listed companies (120 in 2020) of which 44% on international markets and 56% on Italian Stock Exchange; further we conducted 958 engagements – of which 30% concerning ESG issues – with 644 issuers.

The Eurizon Fund – Absolute Green Bonds Fund Managers
Matteo has gained significant experience in the management of bond portfolios, in particular international bonds, emerging market bonds and agencies. In March 2019 he joined the Abi working groups on Banking, Environmental and Climate Changes, Sustainability and Credit Risk. He graduated in Economics and the Management of Institutions and Financial Markets at the Università Cattolica in Milan. He also spent six months at the University of Southampton as an exchange student.

Caterina is a fund manager with 18 years of experience in the  financial industry. Before joining Eurizon, she worked for Epsilon SGR, Banca Mediosim, and Banca Profilo. She has gained significant experience in particular in the management of total return bond portfolios, and in risk management. In March 2019 she joined the Abi working groups on Banking, Environmental and Climate Changes, Sustainability and Credit Risk. Caterina graduated in Mathematics at the University of Bologna and in Social Sciences for Globalization at the Università Statale in Milan.

Important information
This document does not constitute professional investment, legal, accounting or tax advice. It does not constitute a marketing communication of any fund, nor a solicitation relating to any investment product, security, or service. All information and opinions contained in this document represent the author’s judgment at the time of publication and are subject to change without notice. The views expressed are those of the author but may not be those of Eurizon Capital SGR. Data sources (unless otherwise noted): Eurizon Capital SGR, Climate Bond Market Intelligence 2022. Past performance does not predict future returns. There is no guarantee that the positive forecasts in this document will be achieved in the future. This document may not be reproduced (in whole or in part), transmitted, modified or used for public or commercial purposes without the prior written permission of Eurizon Capital SGR.