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By Guillaume Mascotto - May 25, 2018
Going green is no longer limited to recycling or buying energy-efficient appliances. With the rise of the green bond, environmental, social and governance (ESG) investing is now venturing into the fixed income space, helping to fund projects with broader positive environmental impacts.
Green bonds are a growing category of fixed-income securities designed to raise capital for projects with environmental benefits. Representing $155.5 billion of new offerings in 2017 alone1, green bond projects can fund a range of investments areas: renewable energy, energy efficient infrastructure, resource management, clean transportation or even the development of eco-friendly products.
The U.S. leads the category in green bond issuance, closely trailed by China and France (together accounting for 56 percent of 2017 issuance).1 This reflects what we believe to be a growing global interest to invest in solutions contributing to the transition to a low carbon economy. While corporates still make up the biggest share of green bond issuances, the largest issuer in 2017 was U.S.-based agency Fannie Mae, with a staggering $25 billion in green mortgaged-backed securities. The rise of asset-backed securities (ABS) is particularly interesting, as it speaks to diversification in the types of green bonds being brought to market.
With responsible investing firmly rooted in our DNA, American Century's focus on ESG investing across asset classes is integral to our corporate citizenship and business model. We believe innovative debt instruments, like green bonds, give investors the opportunity to take action on global issues they find important, such as climate change and a transition toward a lower-carbon economy.
I recently had the opportunity to participate on the Green Finance panel at the eighth annual BBVA Latin America Conference, where we discussed the number of landmark green bond transactions taking place in the space. My colleague Valeria Cisnero, senior analyst of emerging market corporate credit, and her team have been following the growing demand for green bonds and environmentally-sound financing—particularly in Latin America—and were encouraged by the new bond issues.
"We welcome the expansion of the green bond and loan market in Latin America as a big step toward the improvement of companies' environmental practices," she tells me. "As opportunities arise, we continue to focus on the issuer's credit fundamentals and the quality of their performance. We evaluate environmental issues, as well as social and governance issues. This allows us to maintain our core focus on seeking excess returns for our clients."
While our emerging market debt team sees upside potential in such instruments, challenges remain. Given the relative newness of green bond debt instruments, there's still debate around what's considered "green" and what isn't. Resources like the International Capital Market Association's Green Bond Principles provide investors with some definitions of green projects, but qualifying as "green" may not necessarily mean a bond qualifies as ESG.
While a debt instrument may hit the mark from an environmental perspective, investors should also consider if the proceeds of the bond are naturally aligned with the other pillars of ESG risk assessment. Depending on the sector, social issues we analyze include product safety and quality, cybersecurity, supply chain management and stakeholder engagement. Governance issues, which we consider across all sectors, include business conduct, board independence, risk management structures and executive pay-for-performance alignment.
Our approach combines ESG risk assessment, financial fundamentals and expected returns. This allows us to seek exposure to corporate bonds backed by solid governance credentials and risk management practices, while also seeking the best returns for our clients. We are excited to participate in the evolving space of green finance as it extends into both developed and emerging markets, giving us more opportunities to act in the best interest of our clients through ESG fixed income solutions.
By investing with the intention of helping to advance the Sustainable Development Goals, you can play a critical role in creating a more inclusive society.
Can my investments do well while the companies I invest in do good? This is a question many investors ask as they consider portfolios that assess ESG factors as part of the investment process.
Guillaume Mascotto, head of ESG and Investment Stewardship, discusses how integration of ESG disclosures and company fundamentals is an essential component in the evaluation process.
Learn why we believe investors may achieve alpha with impact without compromising solid returns.
1As of January 2018. Source: Climate Bonds Initiative “Green Bond Highlights 2017”
2As of January 2018. Source: Climate Bonds Initiative “Green Bond Highlights 2017”
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.