Shedding light on sustainable fixed income
With growing investor appetite for sustainable investment options, Shan Kwee, Portfolio Manager in the Janus Henderson Australian Fixed Interest team, explains the different types of investments available and the complexities faced in issuing and tracking sustainable investment outcomes.
Investors are increasingly wanting their money invested in more sustainable ways that deliver better outcomes for society as well as their portfolios. Consumers are becoming more actively engaged with their environmental and social footprints, and sovereign wealth funds, superannuation funds, corporates, insurance companies and firms like Janus Henderson are increasingly seeking ways to invest responsibly and with positive impact.
We fundamentally believe that the consideration of ESG factors is vital to making sound investment decisions. This is consistent with our philosophy of pursuing “quality before price” within fixed interest strategies. We believe that clients end up with better quality portfolios and thus risk adjusted returns.
Environmental, Social and Governance (ESG) risk analysis is incorporated throughout our investment process. Our approach employs negative screens as well as positive impact tilts. We apply this approach across our investment strategies, which we believe to be best practice.
As the market evolves, we are being presented with more opportunities to incorporate assets into our portfolios that positively impact areas like social housing, climate change, women’s leadership and other UN Sustainable Development Goals (SDGs) aligned initiatives.
There are a range of different types of sustainable finance options available and below we introduce each one, discuss some of the trends we are seeing in Australia and also discuss some of the challenges that surround sustainable finance.
Getting to know the different types of sustainable lending options
Green bonds:These are bonds designed to finance eligible green projects and mainly relate to six (or more) star rated green buildings, renewable energy projects, or carbon reduction expenditure. Proceeds of green bonds are used to specifically fund certified green projects. Social bonds:
Similar to green bonds, these are also issued for specific projects, where proceeds are designated for social purposes – such as affordable housing, clean water, or public hospitals. This is a smaller subset of the market, but it is growing. We currently provide capital via social bonds that invest to improve gender equality, reduce poverty, and provide access to affordable housing. Sustainability bonds:
Broader in definition, these are designed to finance projects that could meet either of the green or social bond criteria. The International Capital Market Association (ICMA) published Sustainability-Linked Bond Principles, which aim to minimise the risk of ‘greenwashing’ specific securities, encouraging and incentivising issuance to fund specific sustainability targets. Sustainability-linked bonds:
In these bonds, a measurable, sustainable target is specifically tied to a company. For example, CO2 emissions reduction, or the percentage of renewable energy capacity. The interest paid on the bond can change in the future based on the issuer’s performance against their own ESG criteria. Rather than funding specific sustainability projects, these bonds instead fund general corporate needs (part of which is the attainment of the company’s target). This type of lending represents the vast majority of public debt issuance globally and will likely be a growth area. We expect to see our first sustainability-linked bond issued into Australia this year.
Four examples of holdings within the Janus Henderson Tactical Income Fund*:
National Housing Finance Investment Corporation (NHFIC) Bond:This is a government guaranteed issuer of social bonds that help low income and vulnerable Australians access affordable housing.
| Rating: | AAA |
| Maturity: | June 2032 |
| Current yield: | 2.01% |
| Issue spread: | 0.38% |
| Current spread: | 0.18% |
This bond’s proceeds will be lent to projects aligned with the UN SDGs and it features attractive return opportunities for credit investors at primary issue.
| Rating: | BBB+ |
| Callable: | Feb 2026 |
| Current yield: | 2.16% |
| Issue spread: | 1.85% |
| Current spread: | 1.31% |
This is a well-run, high quality REIT. This bond targets emissions reductions and is the first green bond globally from a retail REIT. Currently this bond shows attractive risk-adjusted returns.
| Rating: | A- |
| Maturity: | Aug 2025 |
| Current yield: | 1.56% |
| Issue spread: | 1.27% |
| Current spread: |
0.90% |
This bond is focused on improving social equality via regional impact projects that improve gender equality. It is AAA rated with a yield advantage over government bonds.
| Rating: | AAA |
| Maturity: | Nov 2025 |
| Yield at issue: | 0.83% |
| Government yield: | 0.61% |
| Spread above government: | 0.22% |
Four challenges for the market
In our view, the continued growth and success of sustainable finance will be dependent on successfully navigating the following four challenges:
- Investors will have to consider the selection of suitably rigorous, ambitious and measurable sustainability performance targets.
- Conventions on when and how measurement is triggered. For example, for a seven-year bond, at what point would measurement take place?
- Conventions on how the borrower’s interest costs will be adjusted based on performance measurement.
- Reporting and independent verification of the sustainability targets.
How we are approaching sustainable finance
The ongoing issuance of green, social and sustainable bonds will be complemented by sustainability-linked issuance, which provides an additional frontier to positive impact investing. At Janus Henderson we feel we are well placed to help clients navigate the growth and evolution in bond markets. We will continue to identify investment opportunities that benefit society and the environment, where investors are also appropriately compensated and provide scope for continued alpha generation.
Given the bespoke nature of the bonds and their complexity in structuring, as active managers we have been engaging directly with CFOs and treasury teams, as well as debt origination desks at the banks to ensure our clients’ interests are appropriately considered, while seeking to promote a viable way to grow the Australian positive impact investing landscape.
*As at 12 May 2021. Any references to individual securities do not constitute a securities recommendation.
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This information is issued by Janus Henderson Investors (Australia) Institutional Funds Management Limited (AFSL 444266, ABN 16 165 119 531). The information herein shall not in any way constitute advice or an invitation to invest. It is solely for information purposes and subject to change without notice. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Any references to individual securities do not constitute a securities recommendation. Past performance is not indicative of future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
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