EdenTree’s David Katimbo- Mugwanya has urged HM Treasury to pull the trigger on issuing the UK’s first green gilts, with the manager readying himself to participate in the issuance of long-dated bonds of this kind for inclusion in the EdenTree Responsible and Sustainable Sterling and Short Dated bond funds.
In November 2020, Chancellor Rishi Sunak confirmed the UK would move ahead with the country’s first sovereign green bond in 2021, entering a market with issuances currently dominated by the European Union.
Katimbo-Mugwanya said EdenTree had been among the investors “urging the government” to do this and continues to maintain conversation with officials regarding the timing and nature of green gilt issuance.
“Having had a chat with the Debt Management Office (DMO), the DMO is quite happy to get it done,” he explained. “It is more or less down to the Treasury to make the call.”
Katimbo-Mugwanya said it is “very likely”, given the current low-yield environment, that UK issuances would be for a “longer maturity”, with shorter maturity “virtually negative yielding”.
“I am not going to say I am attracted by a zero-coupon bond, but at the longer end, at least we can have the safe haven attractiveness of the asset, even though it might not come with much yield on it,” he added. “But the impact that [the issuance] is going to come with it is worth something as well. We are definitely participating there and we are looking forward to supporting the government in that endeavour.”
Green bonds
Katimbo-Mugwanya told Investment Week in 2019 that his funds had little corporate green bond exposure, owing to few sterling-denominated issuances, rife greenwashing and a lack of standardisation.
The market has grown substantially in the time since, growing by £269.5bn in 2020, according to the Climate Bonds Initiative. NN Investment Partners estimates the global green bond market will grow by another €300bn ($364bn) in 2021 to €1trn ($1.2trn).
As a result of growing issuance, particularly from sterling issuers, the EdenTree Responsible and Sustainable Sterling and Short Dated bond funds’ exposure to green bonds has grown significantly.
Katimbo-Mugwanya explained he has “found it easier” to include green bonds in the Short Dated Bond fund, which has a short duration and high quality focus, than in the Sterling fund, which has an objective of an attractive level of income.
“You find green bonds are issued higher up in the capital structure. In a low rate and low spread environment, the pricing, when you add the huge ESG demand on top of that, tends to be quite attractive for the issuer. For a fund that is income-oriented, despite the ESG aspects and despite the attractions of that… it is hard to square that with the income that is quite low. We are definitely open towards green bonds in both funds. It is just a case of the financial aspects lining up as well.”
Source Investment Week