“We want to achieve a major impact in reducing CO2 emissions”

Fundmanager Christian Zima

The interview published in FONDS exklusiv focuses on changes Raiffeisen GreenBonds and discusses regulatory measures, as well as noteworthy projects in which the fund invests.

How has the supply of green bonds changed in recent years?

Christian Zima: A lot has happened. Ten years ago, it was mostly supranational issuers, such as the European Investment Bank, which started to issue green bonds. Some years later, they were followed by the banking sector and then of course by utilities, to finance the construction of power grids, solar farms, and wind farms. This is clearly reflected by the development of the S&P Green Bond Select Index. In 2015, when we launched Raiffeisen-Green-Bonds, the index had about 70 constituents. Now it has almost 1,300. In terms of the fund itself, this has been reflected in an increase in the fund volume from EUR 30 million at the start to the current level of EUR 250 million, which is now invested in a portfolio of around 200 securities, aside from a small cash ratio.

What role has the regulatory framework played?

This dynamic growth was clearly made possible by the Green Bond Principles, published by the International Capital Market Association, which have been revised several times. These principles form a voluntary standard recognised on the market, which obliges the issuers of green bonds to provide transparency and disclosure and sets up an orientation framework for investors. In this regard, the so-called second-party opinion plays a key role. This means that an outside agency reviews whether the standard’s criteria are met or not. In particular, this pertains to the use of the proceeds from the issue, the management of the financed projects, and the reporting, especially with regard to a measurable impact analogous to the emissions targets.

As a fund manager, do you use this external second-party opinion?

From the very beginning, it was important to us that we avoid the risk of greenwashing. Sustainability agencies such as Sustainalytics, ISS ESG, and the Norwegian company Cicero are specialised in the evaluation of green bonds and perform onsite reviews. Accordingly, issuer compliance with the principles has long since been one of our pre-requisites for an investment. Fortunately, these second-party opinions are usually obtained for the bond issues that are eligible for investment on the basis of liquidity considerations. For green bonds issued in the Emerging Markets and sometimes in the USA, however, they are often not available. In such cases, we generally do not make an investment.

Can you list some example projects that you are currently invested in with Raiffeisen-GreenBonds?

We want to maximise our impact, especially with regard to reducing CO2 emissions. With this in mind, one of our focal points is on projects in the field of renewable energies, because with the use of wind or solar energy these projects can generate a verifiable reduction in CO2 emissions. For investors, it is important that we handle the entire range of renewable energies, starting with utility companies building distribution networks and manufacturers of wind turbines and photovoltaic equipment through to wind and solar farm operators. For example, the latter include a US company that recently issued a green bond for project financing to ensure its own supply of electricity with the power station.

We focus on the renovation of existing real estate and the construction of new sustainable properties as well. Banks and governments also account for a large share of the issuers of green bonds held in the fund. Projects of this sort include the financing of a new subway that the Canadian province of Ontario is using to expand its public transport network. Or measures to improve flood control, to help manage the negative consequences of climate change.

How do you check that the issuers of the green bonds in which you invest actually meet the targets they set?

This is done with the reporting, which is available about one year later, based on the Green Bonds Principles I mentioned earlier. Depending on the reports and evaluation of the data, we can also contact the issuers as part of our shareholder engagement policy. If the reporting is not good enough over an extended period, we also sometimes sell off the green bond early. We are not interested in supporting any possible greenwashing.

How can the impacts of your investment be assessed in a verifiable manner?

Depending on the kind of project, it is possible to determine the amount of greenhouse gas emissions that are avoided compared to the previous situation or how much water is saved or how much green electricity is generated, for example. This information is usually reviewed by agencies as part of the second-party opinion. If no problems are found, we use the results for our own calculations to determine the impact for the fund portfolio as a whole.

What are the key financial requirements that you expect of a green bond?

The bond needs to have a minimum volume of EUR 250 to 300 million. The related liquidity is important, so that the security can still be traded in stress situations. These can occur during difficult phases on the market, or if a major bondholder suddenly wants to sell off its securities. Additionally, the bond must have an investment grade rating of BBB-; in some cases we also accept bonds rated one or two steps lower, but never below that. Because ultimately a green bond is just a bond, and that means that the default risk rises if the issuer runs into financial difficulties. What the bond is used to finance is irrelevant in that case. The average rating of the securities in the fund is a single A, with corporate bonds accounting for 50 to 60 per cent. The reason for this is that sovereigns have only really started to enter the market directly more recently.

Does the fund have any currency risk?About two thirds of the securities in the portfolio are issued in EUR. Another one quarter is denominated in USD, and we only have about six per cent of the currency risk hedged. In other words, about 19 per cent of the portfolio profited from the recent appreciation of the US dollar. We want to take advantage of the opportunities for currency gains, but we don’t want to bear the related risks too long.

Christian Zima,
Fundmanager at Raiffeisen Capital Management

What about sustainability risks? What activities do you avoid as an investor?

In the Raiffeisen Group as a whole, we avoid companies that are involved in speculation with foodstuffs, manufacture or trade in controversial weapons, or produce or use the fossil fuel coal. As an investor, for us this means that an issuer that generates more than five per cent of its revenues from power generation using coal or more than ten per cent of its power generation using nuclear energy is not included in our investment universe, regardless of how convincing the green bond may be. Looking ahead, the share of coal will decline to zero in the next five years. Coal is just no longer a modern option.