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April 2020 Quarterly Investment Outlook

Watch our investment management team present a quarterly portfolio update, a global macroeconomic overview and outlook for the next months, as well as our positioning in light of the rapid...

The changing face of European regulation

James Farrugia, a partner at Maltese law firm Ganado Advocates, speaks to Dolfin about upcoming changes in European regulations and the impact Brexit might have on the European financial services industry.

Dolfin’s response to Covid-19

We will safeguard the wellbeing of our team, continue to act as responsible members of the global community, and deliver uninterrupted, high-quality service to our clients and partners.

Green bonds vs SDG bonds

In this latest excerpt from our Q1 2020 investment outlook, Dolfin Credit Analyst Geoff Wan discusses the green bond market, how it has grown over the last few years, and looks to the future and introduction of the SDG (Sustainable Development Goals) format.

25 February 2020 / Sectors & themes

From a small base, the green bond market has grown at a rapid rate over the last few years.

These are bonds issued by corporations or governments with proceeds earmarked for investment in clean water, renewable energy, energy efficiency, land restoration, pollution prevention, ecosystem protection and acquisition of land to mitigate climate change impact. Most green bonds are directly linked to the assets and provide tax exemptions and tax credit to incentivise bondholders.

Moody’s estimates that total global green bond issuance in 2019 is heading towards $250bn.

To give an example, one such green bond is the $500m 2024 maturity bond issued by Clearway Energy in 2014 to fund the acquisition of Alta Wind Farm, the largest of its kind in North America. Credit rating agency Moody’s estimates that total global green bond issuance in 2019 is heading towards $250bn, up markedly compared to the equivalent of $167bn issued the previous year and will be the third consecutive year with issuance greater than $100bn.

In December 2019 the German Federal Government announced its intention to support the development of sustainable financial markets by issuing Green German Government securities in the multi-billions, likely in the second half of 2020, joining its European peers like France and Poland.

As we have seen with the development of the hybrid bond market in Europe (long dated equity-like bonds issued largely by utility and telecommunication companies) and the CoCo bond market which developed after the global financial crisis and are designed to absorb bank losses, investors look for standardisation of securities for ease of comparison and to build confidence in the market place.

The company has pledged to reduce its greenhouse gas emissions to less than 125g/kWh by 2030.

However, in October 2019, giant Italian utility company Enel issued the world’s first sustainable development goals bond, causing a stir in the market. Under this new framework, Enel explicitly linked its cost of debt to the UN’s sustainable development goals in the areas of “affordable and clean energy” and “climate action”. The company has pledged (with external verifiers to monitor its development) to achieve, firstly a 55 per cent renewable generation capacity as a percentage of its total business by the end of 2021 and secondly, to reduce its greenhouse gas emissions to less than 125g/kWh by 2030. In the event Enel fails to achieve these targets, the coupon on its SDG-bonds will step up by 25bp, making it more expensive for Enel to fund its business activities.

The controversy arises as Enel is not committed to use the proceeds from the SDG bonds directly towards green investments but has bought an option not to deliver on these two renewable goals at a cost of 25bp, which leaves room for “greenwashing” – the practice of conveying to investors that the company is more environmentally friendly than the reality.

The taxonomy of sustainable development goals is still a relatively new concept to investors, and we see that banks and corporates have room to push the definition of sustainable activities to align them with their other business objectives. Enel had raised €3.5bn through green bonds since its debut in 2018 and the company went further to tell investors that in future it would replace its green bond program with this new SDG bond format. This sets an uncertain future for the young green bond market and for sustainable funding in public credit markets as a whole.

This article is an extract from our Q1 2020 investment outlook which looks back at the performance of our model portfolios in the preceding quarter, shares how we expect markets to react in the months ahead, and puts a spotlight on some investment themes and ideas with great potential. To download your complementary copy, visit this page.

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Venture capital

In this excerpt from our Q1 2020 investment outlook, Dolfin Senior Investment Manager Anton Kapkin looks at some of the recent trends and developments affecting the global venture capital market.

Anton Kapkin
/ 18 February 2020

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