Dear investor,

In this second edition of our ESG Bulletin, we analyse the rise of sustainable bonds in the wake of the pandemic, highlighting the pre-eminence of social bond issuance by governments, agencies and supranational bodies. We also take a close look at the performance of German 'twin' bonds, which are now one year old, and see what has happened to the 'greenium'. In addition, we update our commitment to sustainability just a few days before the start of the COP26 Climate Summit in Glasgow, where we will be participating in several collaborative initiatives.

SAM ESG Sustainable Investments Team

IN THIS ISSUE

• Sustainable bonds look unstoppable >
  
  
• German twin bonds make it possible to measure the greenium >
  
  
• Measuring ESG in equities: models adapted to investor needs >
  
  
• SAM continues to step up its commitment to sustainability >

Sustainability finds its best ally in fixed-income, there is almost total certainty of financing projects aimed at promoting environmental or social factors when the bonds issued are certified by the authorities, such as ICMA, which are internationally recognised as upholding international standards regarding sustainable debt financing. According to data from Moody's Investors Service, global issuance of green, social and sustainability bonds (broadly speaking, 'sustainable bonds') will reach USD850bn in 2021, an all-time record and 59% more than in 2020, the year in which the pandemic caused a surge in the issuance of this asset class, especially social bonds. In fact, social bond issuance was already rising sharply in 2020, with volume up almost nine-fold to USD 165bn, according to Environmental Finance.

Source: Environmental Finance, Dec. 2020 data

The world of social bonds continues to expand, but perhaps the main shortcoming is the lack of corporate issuers in this segment. Practically 95% of social bond issues are from governments, agencies, supranationals or financial institutions, and only 5% are from companies. The largest issuers of green bonds are also public-sector players, which is logical considering the decarbonisation goals adopted by most countries with a view to achieving net zero by 2050, but environmental bonds have been adopted in practically every sector of the economy, whereas the number of private sector issuers is much smaller in the area of social bonds.

Source: bonddata.org April 2021 (Dec. 2020 data)

It has been a year since the German government issued its first green bond, with a 10-year maturity, and the market has priced its "greenium" with a spread of about -6bp relative to its twin conventional bond. This measurement is possible because the German government defined a framework in which all its green bond issues will be "twins", i.e. they will be green bonds with exactly the same maturity, coupon and interest payment dates as one of its traded conventional bonds, creating fully comparable "twin" bonds.

In fact, Germany plans to establish a "green yield curve" for the Eurozone that may eventually become the interest rate benchmark for the Euro green funding market, in the same way that conventional German sovereign bond IRRs serve as the benchmark for the entire Eurozone. In recent months, Germany has also issued 5-year and 20-year green bonds following the twin approach.

So, the -6bp spread of the German 10-year green bond reflects the "greenium", i.e. the lower return investors are willing to receive in exchange for financing a positive environmental impact. Moreover, demand for these green assets is strong and supply is still scarce, so their prices are rising with respect to conventional bonds, while institutional investors tend to hold these assets in portfolio for longer and are more committed to the investment, based on issue fundamentals and the commitment to the projects being funded, which is favourable for pricing and reduces volatility during market dips.

Source Bloomberg 8/10/21

Integrating ESG analysis into the investment process with customisation in line with each portfolio's mandate is an indisputable competitive advantage in asset management. Moreover, incorporating these factors into a single management tool covering the financial factors affecting investment offers additional potential for value creation in an ESG strategy. The analysis is even more accurate if those two vectors are combined with the financial and ESG risk management strategy of each investment.

Obtaining an ESG score is a process that arises from a custom design for each group of securities according to the impact that each of the three factors (E, S, G) and their variables have on the business. The impact varies depending on the group to which each security belongs and other factors such as the materiality matrix applied in each case.

ESG analysis is performed at the level of each underlying security and then at the portfolio or fund level on an aggregate basis. To obtain a relative rating, the resulting score can be classified on the basis of assets or portfolios that are comparable in terms of geography and sector. Therefore, the information shown regarding an asset's or portfolio's ESG rating is the result of a complex methodological analysis and varies between providers. In fact, studies show that the correlation between ESG ratings produced by different providers is quite low: around 50%. Hence the importance of a sound methodology, and a high degree of coverage. Plus full integration into the investment process.

SAM's SRI methodology

Source: SAM

As part of our commitment to the Net Zero Asset Managers initiative, we signed a letter that has been sent to governments around the world calling for more decisive action in the fight against climate change. This letter was launched with a view to the negotiations that will begin at COP26 in Glasgow in November.

On 26 October, SAM will hold a virtual event for its institutional clients where we will present the objectives of the Institutional Investors for Climate Change Group (IIGCC), of which we are a member, and we will learn about the real experience of two private companies that are pioneers in the design of solutions that citizens and companies can use to participate in this transformation towards a low carbon economy.