Greening fixed income markets: a challenge for today and tomorrow

Policymakers around the world continue to implement comprehensive strategies to foster sustainable finance.

Carbon pricing at the roots of the debate

In a 2016 paper, William Nordhaus, the 2018 Nobel Prize recipient, wrote that while there is uncertainty on the path of climate change and its impact in the future, this does not reduce the urgency of taking strong climate-change policies today¹. In a recent speech², he mentioned three key actions that organisations, companies and financial institutions can undertake for an efficient fight against climate change:

• Carbon pricing: today, the price of carbon dioxide emissions is zero almost everywhere in the world. Without high prices on carbon emissions, no policy or action will be effective.
• Environmental science: to understand climate change, governments and institutions need to promote environmental science and innovation in the field.
• Long-term investing: companies need to assess their carbon footprint and risks associated in a forward-looking business scheme.

The financial industry has a clear role to play in channelling capital to the relevant sectors, actors and projects. They can direct them in such a way that each player follows good practices. In particular, ‘greening’ fixed income markets, the largest source of financing, will be critical if the financial sector successfully embraces the Paris climate agreement goals.

Institutional issuers: the question of yield and additionality

However, there are two major obstacles for fixed income investors seeking to invest in green and sustainable solutions: yield, and additionality.

Indeed, the green bond market is concentrated on supranationals, sovereigns or large utilities. Therefore, two problems may occur:

• Problem of yield: these issuers are mostly investment grade, and in developed markets.
• Problem of additionality: these actors already have access to markets to finance their green activities. Whether they finance these projects via a normal bond or a green bond yields little for investors seeking to have a real ‘additional’ impact.

New frontiers to set in the green bond market

Amundi partners with key players to answer these issues, employing a holistic approach. To address these obstacles, new frontiers of green finance need to be explored:

• A geographic frontier: in emerging markets, more yield and additionality can be found. In 2018, Amundi and the International Finance Corporation (IFC) announced the successful launch of the world’s largest targeted green bond fund focused on emerging markets.
• An issuer frontier: new issuers at the forefront of the fight against climate change, both public and private, need to be given wider access to capital. In 2019, Amundi and the Asian Infrastructure Investment Bank (AIIB) unveiled a new project to develop the climate bond market. It is a first-of-its-kind investment solution applying the AIIB Climate Change Investment framework, which takes into account three variables to evaluate an issuer’s ability to cope with climate change; the portion of green business activities, climate change mitigation practices, along with the issuer’s resilience to climate change.

The Asia Climate Bond Portfolio will invest in labelled and unlabelled green bonds and engage with issuing companies to help them transition their business models to increase climate resilience and green leadership. The portfolio will seek performance by identifying, analysing and selecting tomorrow’s climate champions based on the framework, which ultimately supports the Paris agreement, and drive climate change action in Asia.

• An instrument frontier: high-yield bonds, private debt, and unlabelled green instruments have to be designed. In 2019, Amundi and the European Investment Bank (EIB) launched the Partnership to expand Green Finance in Europe. The Green Credit Continuum Project aims to foster the development of the green debt market beyond the existing green bonds, supporting small-scale green projects, and financing small and medium-sized enterprises and mid-caps.

Find out more here.

¹ William D. Nordhaus, “Projections and uncertainties about climate change in an era of minimal climate policies”, NBER Working Paper Series, 2016.
² Amundi World Investment Forum, William D. Nordhaus keynote speech available here.

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