A top executive at the world’s biggest pension fund has expressed doubts over green bonds, saying that, without fundamental changes, the asset class risks becoming a “passing fad”.
Global green bond issuance, which was almost nonexistent a decade ago, reached $47bn in the first quarter of 2019, according to Moody’s credit rating agency. Total global issuance of the bonds, which are issued to support specific environmental projects, is expected to hit $200bn by the end of the year, from $167bn in 2018.
Japan’s Government Pension Investment Fund is becoming more heavily involved, demanding that its asset managers weave environmental, social and governance parameters into their investments. Buying green bonds is a “direct” way to achieve similar aims, the Y151tn ($1.4tn)-in-assets fund said in late June.
But at the same time, Hiro Mizuno, chief investment officer of the GPIF, told the FT that he is not convinced that such bonds will become a “mainstream investment product”.
For issuers, green bonds are “more costly and complicated and cumbersome” to arrange, he told the FT, while for investors, “it’s a bond with the same credit rating and the same interest rate — but they have to live with less liquidity”.
For green bonds to catch on, they have to be cost-effective for borrowers, Mr Mizuno said, pointing to Verizon’s example of a successful green bond sale. Earlier this year, the US telecoms group’s $1bn green bond was eight times oversubscribed, allowing it to price the debt at a lower yield than the company’s regular bonds.
“If, like in Verizon’s case, the issuer can repeatedly issue more attractively, the additional cost of green bonds can be justified by the market,” he said.
Mr Mizuno branded green bonds a “lose-lose” proposition at a UN conference in Paris last November. These remarks “very much set a negative tone for the market,” said Jason Mortimer, senior portfolio manager at Nomura Asset Management, on the grounds that “asset managers and other institutional investors are keenly focused on demand signals from the GPIF.”
Mr Mizuno is not alone in his scepticism, because questions about “greenwashing,” how projects are selected, and a thicket of guidelines and regulations have surrounded the market since its infancy.
Japan has lagged behind other regions in addressing climate-related risk. Despite being the world’s largest pension fund, the GPIF crept in at 37th place in a global survey of funds’ attitudes towards ESG issues last year.
Measured on four factors including how climate-related risks are managed and measured, the Asset Owners Disclosure Project graded the GPIF “C”, meaning that it was “starting to take action.”
The GPIF has partnered with the World Bank and the European Investment Bank to explore initiatives designed to promote green bonds, and its asset managers have invested an initial $500m in green bonds through the World Bank.
“They are an opinion leader,” said Sachie Ii, head of sustainable finance at Japanese investment bank Mizuho, adding that the GPIF’s increased involvement “is a tipping point”.
Despite these partnerships, Mr Mizuno remains doubtful: “Without addressing my original questions, there’s still a risk that the green bond will remain a passing fad.”
Source Financial Times