Why Axa is steering clear of green bond funds

Issuance of green bonds has been steadily rising in recent years, and in turn so has the number of funds dedicated to investing in them—but not all experts are convinced about the merits of such products. 

Axa Insurance is staying away from offering these strategies on its platform—at least for now—because they offer relatively poor returns, said Ernest Low, Singapore-based deputy director for investment and wealth management.

Low's comments highlight the challenge for investors seeking to balance growing interest in environment, social and governance-based (ESG) investing against the need to deliver financial performance. They also point to a question many in the industry are debating: whether ESG initiatives are best judged by traditional yardsticks of performance.

“We were exploring the idea of investing in green bond funds, but the returns are almost zero or negative over the past three years,” Low told AsianInvestor, and even over a five-year period, returns were almost flat.

One reason for the poor performance is the fact that the funds tend to contain long-dated bonds, whose yields have taken a hit as US interest rates started to climb from 2016, he said.

His point is underlined by the fact at least one widely tracked global green bond benchmark—the S&P Green Bond Index, launched in July 2014—gained just 0.5% (annualised) in the three years to November 6.

However, Low acknowledged that individual green bonds—which are issued to raise money for environmentally focused projects—may well have performed better over that period.

Some experts pointed out that indices such as S&P's or the Bloomberg Barclays MSCI Global Bond index, are heavily tilted towards green bonds issued in Europe or the US, which influences how the index behaves.

“There is a natural bias in some of these indices given that bond yields have been low in both markets,” noted Sean Kidney, chief executive at Climate Bonds Initiative, an industry body that aims to encourage private capital to finance climate change solutions.

Nevertheless, Axa is looking elsewhere. Low said he was now looking to add at least two ESG equity-focused funds to its platform for wealthy clients in Singapore.

According to S&P, the global green bond market had $232 billion in outstanding debt at the end of September. Europe and the Americas account for a little over 50% of the global issuance this year, and China is another heavyweight, accounting for 15% of issuance, S&P data showed.

Returns versus the greater good

There is considerable debate among industry experts on whether conventional performance measures such as returns should be used to assess the success of green bonds and other ESG initiatives.

While ESG awareness is growing in Asia, the search for yield remains at the front of most investors' minds.

“Asian investors still see financial returns as their primary investment objective compared to incorporating green factors in their investments,” Arthur Lau, co-head of emerging markets fixed income and Asia ex-Japan head of fixed income at Pinebridge Investments, told AsianInvestor.

Yet Bryan Carter, head of emerging markets fixed income at BNP Paribas Asset Management, holds a different view: he believes investors who put their money in green bonds typically don’t expect the asset class to outperform. “They are simply putting their money where their ethos is.”

However, the lack of consensus on how green bonds should be assessed is only one challenge among the many facing this fast-growing but young market.

“There is no standardisation in terms of how green bonds are certified or what ESG criteria are used," noted Carter. "Due diligence standards are poor and there is a lack of persistent monitoring of how funds are used once they are raised in a bond issue.”

Even when using broader ESG criteria in fixed income, investors need to manage their returns expectations, he said. “Sustainability and institutional governance don’t always translate into better near-term financial performance.” 

While it could be argued that an ESG focus will improve the long-term performance of bonds, noted Carter, there is not enough data to prove that investing in bonds that scored high on ESG factors helps investors avoid issues such as bond defaults or country crises.

Low faith in ESG results?

What's more, a global survey released in October by Hermes Investment Management of 104 institutional investors across Europe, the US and Asia Pacific showed that fewer than half (48%) believe companies that focus on ESG issues produce better long-term results.

Many investors cling to the idea that to meet ESG criteria, something must be sacrificed, the survey noted.

“The link between ESG considerations and financial value creation needs to be more clearly recognised," it added. "Companies that can adapt to social and environmental change are likely to deliver long-term results for shareholders."

Experts say green bonds and the broader universe of ESG products will continue to see demand driven by growing worries about climate change risks, a push by global pension funds to integrate ESG into their investments and the opening of new markets such as China.

Moreover, Hong Kong is considering establishing a green bank in an attempt to become a regional hub for green bonds and other related finance initiatives, AsianInvestor reported last month.