BlackRock Inc. and some of the world's other major asset managers are setting up funds focused on green bonds. The trick is finding enough of the debt to buy.
BlackRock is developing green bond funds that would compete with Allianz SE and Axa SA, Europe's largest insurers, as well as
State Street Corp., which all created similar products last year. Green bonds are issued by development banks, municipalities, utilities and companies to raise money for measures and projects aimed at benefiting the environment.
“We're seeing strong interest from the different types of clients we service, from large institutional to family-office clients, down to retail investors,” said Ashley Schulten, a director at BlackRock.
Issuance is growing as well. Companies, governments and multilateral agencies like the European Bank for Reconstruction & Development have sold more than $25 billion of green bonds this year, up nearly 80% rom the same period a year ago, according to data on credited issuance compiled by Bloomberg. If sales continue at their current pace, there could be about $55.8 billion of green bonds this year, according to an estimate from Bloomberg New Energy Finance, up from around $46 billion issued last year, a figure that includes uncredited issuance.
Still, there just aren't enough bonds given the demand, said Alex Struc, a London-based portfolio manager at Pimco Europe Ltd. “We don't have a fund dedicated to green bonds because we don't think it's a feasible proposition today,” he said.
“You don't want to create a vehicle that is forced to buy green bonds. It's a recipe for non-commonsense prices by investors and it becomes a demand without supply,” Mr. Struc said. Pimco invests in green bonds but does not have an investment quota.
Much of the growth in green bond issuance comes from China, which first okayed the sale of the securities in December. Companies and other issuers there have sold more than $8.45 billion green bonds this year, mostly denominated in yuan, Bloomberg data show. The government has approved issuers to sell more than $15 billion of green bonds to help tackle pollution so far this year, People's Bank of China research bureau chief economist Ma Jun said at a summit in Beijing Tuesday.
Those sales have largely been to domestic investors. It is unclear how strong demand outside of China will be for the bonds, which may differ from those of other nations, law firm Reed Smith LLP said in a May report. Most notably, clean-coal power stations qualify for green-bond status, whereas foreign environmental investors generally shun anything tied to fossil fuels.
“Something labeled 'green' in China may not be 'green' outside of China,” Reed Smith said in its report. “This could certainly limit its appeal to international investors.”
Yields on regular corporate bonds are low in the U.S. and in Europe, where the European Central Bank has just started buying company debt to stimulate the economy, which gives issuers less incentive to look for creative forms of financing. Selling green bonds also has added costs that may deter some issuers, said Gregory Elders, an analyst in environmental, social, and governance matters at Bloomberg Intelligence in New York. U.S. corporate issuance has fallen about 20% for the year compared with the same period last year, according to Bloomberg data on credited deals.
Investors are interested in buying securities that help make the world better, said Suzanne Buchta, a managing director for green bonds at
Bank of America Corp., the biggest underwriter of green bond sales globally.
“There's a growing pool of green investors that care,” she said.
That's what money managers including
BlackRock are betting on. NN Investment Partners BV set up a green bond fund with 20 million euros in March and wants to attract at least 300 million euros within about three years, according to Bram Bos, a senior portfolio manager for sustainable credits and green bonds. The company looks after 187 billion euros in total.
State Street Global Advisors launched a second green bond fund in April 2015 with about 10 million euros that's grown to about 23 million euros, according to Niall O'Leary, the Dublin-based head of EMEA fixed-income portfolio strategists at the company with $2.3 trillion under management. The fund is benchmarked against the
Barclays MSCI Green Bond Index, he said.
“It's a relatively small market but it's growing steadily,” Mr. O'Leary said. “We would expect to see our fund grow as investors continue to embrace the growing green bond market.”
Allianz Global Investors' green bond fund now has 19.7 million euros under management, up from 18.3 million euros when it began November, Marc Savani, a spokesman for the company, said in an e-mail. Banks including Raiffeisen Bank International AG and Natixis SA have also started funds.
Clients are inquiring about the funds, said Henrietta Pacquement, a London-based portfolio manager at ECM Asset Management Ltd., which is part of
Wells Fargo Asset Management. “While we've not got a specific mandate, we are taking note of them because people are become more sensitive to that kind of issue.”
