The Nikko AM Global Green Bond Strategy is an SRI/ESG vehicle investing in securities that finance projects that help in mitigation and adaption to climate change. The strategy invests primarily in AAA rated Green Bonds, issued by some of the strongest global institutions with AAA credit ratings. The strategy provides investors access to Green Bonds, through a long-standing diversified and actively managed portfolio.
“An investment into Green Bonds can offer an investor a unique combination of providing investment to help to mitigate global climate change in developed and emerging markets, whilst providing capital gains and income over the mid to long term for investors.”
Why Green Bonds?
- Green Bonds raise funds for new and existing projects which deliver environmental benefits
- To meet agreements set in Paris accord, Green Bonds will be a significant investment instrument
- Provides investors with a tax-exempt income and the satisfaction of knowing that the proceeds of their investment will be used in a positive manner
- Capital markets and bond issues play a central role in raising capital globally and crowding-in public and private investors from all over the world
- Growing segment of the fixed income universe is ‘Green Bonds’, reflecting the increasing importance being placed on environmental sustainability
- Over the last 5 years, the market has significantly grown. By 2020, the market value for SSA Green Bonds is expected to be USD250m+
- Funds raised finance the development of new or existing environmental projects, including renewable energy, sustainable water management and pollution prevention
- The Green SSA market is large and liquid and the demand for such high quality paper makes these investments trade at lower yields to competing spread products but above sovereign debt of the respective country
- There are many different Green Bond issuers and proceeds are used for a broad range of applications
- SSA Green Bonds represent the ‘gold standard’ of environmental friendliness
Green Bond Investment Universe
Example of the Scale of Green Bond Purity
All Green Bonds that will be purchased will be eligible to be included in the BofA Merill Lynch Green Bond Index. The BofA Merrill Lynch Green Bond Index tracks the performance of securities issued for qualified “green” purposes. Bonds must have a clearly designated use of proceeds that is solely applied towards projects or activities that promote climate change mitigation or adaptation or other environmental sustainability purposes.
The investment team evaluates both developed and emerging markets and forms allocation decisions based on their in-house investment views. Nikko AM believes the exposure to emerging markets is an attractive addition and differentiator to other Green Bond portfolios and an alpha opportunity. The team will invest actively and rebalance emerging market and developed market allocation based on market conditions.
Due to the availability of Green Bond paper in the SSA investment universe, it is the intent of the investment team to invest as close as possible to 100% of the Fund in Green Bonds. In situations, where it is not possible to achieve access to desired Green Bonds on direct issues, the investment team will utilise FX overlay to allow for efficient portfolio risk management. In addition to supranationals, Nikko AM would consider purchasing government issued Green Bonds and local authorities.
The Lead Portfolio Manager, Steve Williams, sits within the wider Global Fixed Income team in London, led by Andre Severino. The team consists of 11 investment professionals in London with a further 4 in Nikko AM’s Sydney office with an average of 15 years of investment management experience. The team has significantly broadened over time to support the strategies’ growth and cater to institutional portfolios. One of our biggest advantages is the fluid interaction across these four categories and the ability to execute decisions quickly, once a team decision has been made. The diagram below illustrates the organisational structure in London.
“A consistent four-step investment process which incorporates quantitative and qualitative inputs, engaging the team in a collaborative process to generate ideas reflected in high conviction duration, currency, credit and yield curve calls to construct a Green Bond portfolio”
Embedded Risk Management
Ongoing risk management is integral to the entire investment process with constant dialogue between our investment and independent risk management teams in ensuring that risks are identified, evaluated, monitored and mitigated.
Proven Track Record
Nikko AM has a long history in managing Green Bonds and launched the world’s first Green Bond Fund in 2010. As well as dedicated Green Bond strategies, we also hold Green Bonds in our other Global Fixed Income portfolios.
Nikko AM’s investment team has no input into setting and or executing the “green” component of this strategy. It is this very impartiality which strengthens the product as a whole for the end investor. Unlike some of their peers, the investment team can focus their energies on what they do best – analysing and investing in global currency and bond markets.
Fluid interaction across the investment team and the ability to make decisions promptly. By working in an open environment, the team works in close proximity and ideas don’t get lost waiting for an Investment Committee decision at each level.
A key aspect of due diligence towards the issuers for Nikko AM is the transparency the issuer provides on their Green Bond programme. Additionally, the quality of reporting and availability of information would be taken into account.
Perhaps the most recognised risk related to Green Bonds is 'greenwashing', which is defined as the superficial or insincere display of concern for the environment.
The strategy does not have exposure to green corporate bonds, where credibility and transparency of programmes can be questioned.
Before investing, Nikko AM would assess the following before making the decision to invest:
- Clear description of the projects to be financed (including goals, projected impacts, sustainable development principals)
- Competent project selection as well as a fully transparent process of the management of proceeds
- A frequent public reporting including project description, allocation of funds and environmental impacts (quantified where feasible)
- A verification of the project selection and use of funds from an independent third party