Emma Wall: Hello and welcome to the Morningstar video, 'Why Should I Invest With You.' I am Emma Wall and I am joined today by Bertrand Gacon, Head of Impact for Lombard Odier.
Hello, Bertrand.
Bertrand Gacon: Good morning.
Wall: So, we are here today to talk about green investing, climate investing. What is the first question, a green bond?
Gacon: Right. A green bond is a very conventional instrument that all investors can use very easily in their portfolio. The only difference with a normal bond they are issued by the same issuers, they have the same rating, they have the same risk and return profile. There are two major differences with a conventional bond; the first one is transparency, they provide you with a very detailed documentation about the use of proceeds; and the second one is a ring-fencing mechanism that allows you as an investor to have confidence on the fact that the money would only be used to finance some green infrastructure.
And with those two features, it is possible for investors to use those instrument and to put their capital at work for the environmental transition while still benefitting from the same financial features as the one you have in conventional bond investments.
Wall: And within that sector there is a type of bond called climate bond which you are finding particularly interesting at the moment, aren't you?
Gacon: Yes, the climate bond is the broader universe. The green bond is a labeled market – self labeled market that provides investors with additional guaranties about those features I've just mentioned. But there is a broader universe called climate bond, which basically are issued by pure play companies that are active in the environment or sector. They do not go through the same, I would say reporting and transparency features.
They might not have the full ringfencing mechanism, but still because those companies are pure play environmental companies, those bonds are still financing green infrastructure. So, if you're very selective in the way you're looking at those bonds, you can include them in the broader universe.
Wall: And how much does macro impact this sort of investment because you've got somebody in the White House, who arguably doesn't particularly believe in things such as global warming and suddenly isn't a fan of renewable energy. Do you see that as a headwind or is this sector sort of got its own tailwinds, fundamentals?
Gacon: Well, we are not too worried about that to be honest and the major reason for that is that, most of what happens on the green bond market doesn’t come out of the States. A large part of the issuers are either corporates or supranational or even some municipalities or some local governments. And in all cases, the influence of the new elected President in the U.S. would be very minimal in those issuances.
Wall: And ESG; environment, social and governance factors are increasingly becoming a part of the way that investors want to manage their portfolios, an overlay, if you will, on top of profitability. How can people who are interested in this sector get access to green bonds and climate bonds?
Gacon: It’s a specific market, so you need to have, well, the expertise to identify those bonds. The verification process is very important to us to make sure that the environmental impact really is there. Even within the labeled green bond market, we do believe there are some bonds that are, I would say, darker green versus other ones are lighter green. So it's very important to do the verification in a very rigorous manner. But it's an instrument that by design is very accessible.
Again, it is traded on the major markets. It's very easy for every investor to buy those bonds or to use a fund that is already build around that strategy. And the very key benefit if you compare with the more traditional ESG approach that it really impacts instead of rating the quality of the issuer, which is what the ESG approach would do, you can really focus on the issuance itself, so on the bond itself, and make sure that the project that is being financed is delivering the high impact that you are looking for. And in that condition, it is again possible to design a convincing high impact strategy within a very liquid asset class.
Wall: Gacon, thank you very much.
Gacon: Thanks a lot.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
