21 June 2018
Frédéric Samama has been a key mover in the Portfolio Decarbonisation Coalition, the creation of low-carbon indexes, and now the world's biggest green bond fund. He talks to Peter Cripps
Frédéric Samama was in upbeat mood when he addressed Environmental Finance's inaugural Green Bonds Asia conference in Singapore.
Amundi's co-head of institutional clients coverage – and its unofficial green finance advocate-in-chief – had every reason to be bullish. The French asset management giant earlier this year raised $1.4 billion for the Amundi Planet Emerging Green One, a fund that aims to buy labelled green bonds issued by emerging market banks.
The closed-ended vehicle, which was the brainchild of Jean-Marie Masse, chief investment officer for financial institutions group at the International Finance Corporation (IFC) – the private sector arm of the World Bank Group – is four times larger than any other green bond fund and has single-handedly nearly doubled the value of the green bond fund market.
Samama told the conference that the fund's "genius" is its ability to help address two key problems that restrict flows of capital from the developed world to green projects in the developing world –that investors in developed markets are typically unable to invest in emerging market debt, or to invest in infrastructure projects.
To overcome the first problem, elaborated Samama, the fund has a risk sharing mechanism that sees the IFC and other development banks, including Proparco, the European Investment Bank and the European Bank for Reconstruction and Development, invest in mezzanine and junior tranches of the fund to help make the senior tranche less risky.
When it comes to the second problem: "The IFC had a moment of genius. What about having banks issue green bonds? Banks are very familiar animals, they are very well regulated. By issuing a green bond, the bank makes a commitment to channel the money towards green infrastructure projects.
"It's a way to solve a big challenge of allocating more money to emerging market infrastructure using banks as an intermediary. It's perhaps the best use of green bonds. When Apple issues a green bond, it doesn't really change anything!"
"[The emerging market green bond fund] is a way to create a bridge between pools of green savings and the needs of green infrastructure in emerging markets. It’s brilliant!"
For these reasons, the Emerging Green One is "more than a green bond fund", enthuses Samama. "This product is a way to create a bridge between pools of green savings and the needs of green infrastructure in emerging markets. It's very innovative. It's brilliant!"
Apart from the development finance institutions, the investors in the fund are primarily European pension funds. For many, it is understood to be their first investment into a vehicle specialising in emerging market debt.
The Emerging Green One will complement Amundi's two other green bond funds – Amundi Impact Green Bond and Amundi Responsible Investing – Green Bonds.
These are part of Amundi's growing suite of green products. Samama says the asset manager, which had €1.45 trillion ($1.7 trillion) under management at the end of March, now has $15 billion of green assets, including green bonds, low-carbon indexes, real assets and a joint venture with EDF, called Amundi Energy Transition.
Partly thanks to Samama's influence, the asset manager can claim to be among the most advanced when it comes to low-carbon and green investment. It began exploring the theme nearly a decade ago when it sponsored an academic centre at Columbia University.
The university examined the potential role of investors in the transition to a low-carbon economy, which at the time was a relatively new concept, explains Samama.
"In the midst of the financial crisis, it was about thinking outside the box. Maybe long-term investors were a solution that had not been exploited so far. At the time, some people found it bizarre to think that investors can have an impact on society."
This research led to the formation of the Portfolio Decarbonisation Coalition (PDC), whose founding members were Amundi, Swedish pension fund AP4, the UN Environment Programme's Finance Initiative, and the CDP (formerly known as the Carbon Disclosure Project).
The PDC is a coalition of investors trying to decarbonise their portfolios and share their learnings. A total of 32 investors, worth a combined $3.6 trillion, have currently signed up. Between them, they have allocated $800 billion to low-carbon investments, smashing the PDC's initial target of $500 billion.
"The point of the coalition was to gather the 'doers'. It sends a super-strong signal to policymakers," explains Samama. "When investors integrate climate change into their investment process, the job will be done."
Amundi can claim to have helped develop some of the first low-carbon indexes, The Low Carbon Leaders Index, in partnership with MSCI. The index tracks the MSCI All Country World Index by assigning a weighting to each stock based on its carbon emissions and fossil fuel reserves. No specific sectors are excluded, but those that emit high levels of carbon are underweighted, while those with lower emissions are overweighted.
Funds based on these indexes have attracted significant allocations from investors including Swedish pension fund AP4 and French fund FRR.
There is compelling evidence that these indexes are outperforming their benchmarks, says Samama. For example, over the past eight years, the North American index has outperformed by 41 basis points per year, and the Europe index by 53 basis points per year. "Many investors are smiling at me," he adds.
He attributes this outperformance to the poor performance of coal companies, which are underweight in the index.
"The indexes are an option on climate risks being integrated," he explains. "You don't need a price on carbon, you need the anticipation of a price.
"Major investors - Allianz, Axa and Amundi - have disinvested. They are already anticipating there will be a tax or pressure on coal. They are moving faster than regulators."
He points out that low-carbon indexes have now been adopted by giant pension funds such as GPIF in Japan, and CalSTRS and New York Commons in the US.
"Major investors - Allianz, Axa and Amundi - have disinvested [coal]"
Overall, Samama is encouraged by the giant strides being taken by the financial community in waking up to climate change.
"Honestly, I think we are reaching the tipping point now. All the ingredients are here.
"We have been talking about climate change for decades – originally it was all about NGOs. Investors entered the game super-recently.
"At COP21 [the Paris climate change Agreement in 2015], we shifted from individuals to some institutions. It was all about Europeans. Since, we have also had GPIF, CalSTRS, [Canadian pension fund] CDPQ, and the New Zealand Superannuation Fund.
"Policymakers and regulators are accelerating action. There's nowhere to hide any more for investors."
Amundi's portfolio managers, for their part, now take environmental, social and governance (ESG) factors including climate into consideration as part of their "normal business", claims Samama.
He argues that climate change is perhaps the most material consideration within ESG.
"You can't invest in car makers these days without integrating the new regulation on diesel cars. By 2025 you won't have any diesel cars in Madrid, Athens or Paris. It was decided very abruptly. It takes five to seven years to launch a car, so 2025 is tomorrow!
"There has been a €100 billion fall in the value of the top five European utilities between 2008 and 2013 as they did not anticipate correctly the rise of renewables.
"It's happening here and now." EF