Nicolas Racaud
Fixed Income Portfolio Manager Specialisation: IG Credit, Crossover & ESG
In line with the development of its range dedicated to responsible investment, Rothschild & Co Asset Management Europe recently launched a fund specializing in green bonds.
Introduction of this new product by Nicolas Racaud and Emmanuel Petit.
What is R-co 4Change Green Bonds?
R-co 4Change Green Bonds is a bond fund dedicated to financing the economy’s transition to a more sustainable model. It invests mainly in debt securities known as “Green Bonds”, issued by companies aiming to finance projects involved in the energy transition and mitigating the effects of climate change. R-co 4Change Green Bonds invests in Europe(1) and internationally(2), in all currencies, with at least 75% of green bonds, aiming to deliver on our ambition to contribute to the ecological transition while outperforming its reference index (Bloomberg Barclays Global Green Bond Index: Corporate). The green bonds are selected incompliance with the current market standard as defined by the the ”Green Bond Principles”, the four core components being the Use of Proceeds, Process for Project Evaluation and Selection, Management of Proceeds, and Reporting, set by the International Capital Market Association (3) (ICMA). This investment vehicle therefore not only aims to capitalize on our expertise in bond management, but also our competence in responsible investment to deliver an investment solution that conveys meaning, from both a financial and extra-financial point of view.
What are Green Bonds?
A “green bond” is one whereby the proceeds from its issue are dedicated exclusively to financing environmental projects within a reference framework (CBI, ICMA (1), etc.). This financing should enable issuers to change their business model towards greater environmental sustainability and to contribute to the energy and ecological transition. Green bonds can be issued by companies, governments or any other supranational institution. They are still listed financial instruments, the characteristics of which are determined according to their issuer. Their risk-return profile therefore tends to be similar to that of a traditional bond. The fund’s objective is to generate performance, net of management fees, superior to that of the Bloomberg Barclays Global Green Bond Index: Corporate, by investing a minimum of 75% in green bonds over the recommended investment period. The fund seeks to finance the energy transition and contribute to the ecological transition. (1) Climate Bonds Initiative and International Capital Market Association. These are two non-profit organisations of finance professionals who have determined a strict framework to define Green Bonds. |
(1) The fund may be invested to a maximum of 10% of its assets in securities and bonds issued by non-OECD member states and/or issuers with registered office in a non-OECD country. (2) The exposure to currency risk is up to 50%. (3) The International Capital Market Association (ICMA) is a non-profit association of members from all sectors of the debt securities markets, whose committees help clarify and promote its work on regulatory issues and market practices affecting all aspects of the functioning of international markets.
What are the dynamics of the green bond market?
The green bond market is booming and could reach $ 1 trillion by the end of the year (4). If we simply take our index as a benchmark, it currently consists of 226 stocks from around 100 issuers. By comparison, it held less than 50 securities in 2015 and barely 100 even last year. Central banks themselves are somewhat connected to this trend. Indeed, by including around 20% of green bonds in its balance sheet, the ECB has contributed to the increased appeal of such issues.
In addition, following the COVID-19 crisis, many governments have accompanied their recovery and support plans with measures that favour a greener and more responsible economy. These political discourses reflect an awareness and will to change our societal model. If these statements turn into actions, such momentum should be favourable to further development of the green bond market. We wish to support such efforts by promoting their financing.
How do you apply your expertise to this product?
We believe that the green bond market has now reached a certain maturity, with securities offering varied risk-return profiles enabling us to find the different performance drivers specific to our expertise in fixed-income management. Although companies in the financial and utility sectors are over-represented, the proliferation of issuers has made it possible to increase the sectoral and geographic diversification of the asset class.
The diversification pocket of the fund, which can represent up to 25% of the portfolio, provides us with the opportunity to try to overcome the structural biases of the green bond market by allowing us to diversify our exposure and finance companies that are just as much committed to the ecological transition. If these issuers are in line with the responsible investment framework that we have defined, we can support them by investing in “traditionnal” bonds that match the overall strategy of the fund, i.e., coming from issuers that do not harm the environment.
In addition, in order to optimise the risk-return profile of the fund, we have the option of integrating bonds of speculative nature, known as high yield bonds(5), up to a maximum of 10% of net assets and the same percentage of unrated securities, as well as also using interest rate and currency derivatives(6). This diversification must be consistent with the overall strategy of the fund, through the selection of issuers whose activity does not harm the environment. This flexibility provides both a lever of opportunities, allowing to capture returns across credit curves, as well as protecting from credit risk linked to the quality of the issuer, duration (7), liquidity or currency.
(4) Sources: BloombergNEF, Bloomberg LP, Climate Bond Initiative, Rothschild & Co Asset Management Europe - 2020 (5) High yield bonds are issued by companies or states with a high credit risk. Their financial rating is below BBB- on the Standard & Poor’s scale. (6) Financial instrument whose value fluctuates according to the evolution of an underlying asset. (7) Approximate measure of the period after which the yield on a bond is no longer affected by changes in interest rates.
Do you have a specific investment process for this fund?
The management process for R-co 4Change Green Bonds is very similar to the one we usually apply for our fixed-income management, thus benefiting from all of Rothschild & Co Asset Management Europe’s expertise in this asset class. Security selection is based on in-depth company analysis, integrating financial and extra-financial criteria (8) to identify the most attractive opportunities, while taking into account market (9), credit (10) and liquidity (11) risks specific to each. In addition, the fund complies with our engagement policy which consists of engaging in dialogues with issuers around non-financial themes and issues.
However, given the special nature of green bonds, we have had to adapt our approach to incorporate the framework of constraints that define them. We seek to invest only in green bonds that respect the four principles set by ICMA and aim to meet the highest market standards thanks to a transparent process based on external and independent tools, associated with the excellence and rigour of our institution. Obviously, we also benefit from synergies with the management teams of our fund range dedicated to climate change.
Finally, to ensure that the securities selected comply with the green bonds framework, we have deliberately chosen a relevant benchmark and involve our internal control teams for the monitoring aspects.
How does this new fund complement your responsible investment offering?
Our 4Change Climate range is dedicated toto climate change and the reduction of greenhouse gas emissions, while our R-co 4Change Human Value fund focuses mainly on social and societal issues through the selection of companies whose human capital is the main source of added value. Similar to the “climate” range, R-co 4Change Green Bonds also targets aimed the environment, but with a focus on ecological and energy transition. The traceability of funds raised within the very specific green bonds framework allows to clearly identify and control the allocation of capital. As a result, R-co 4Change Green Bonds ensures by nature great transparency of the projects it finances. ■
Find all the information available on the fund: R-co 4Change Green Bonds
