12 July 2019
Last year, French asset management giant Amundi closed the world's largest green bond fund at $1.42 billion*; a year later, it's beating its performance metrics. Head of institutional and sovereign clients coverage Frederic Samama explains the secrets behind its success.
Environmental Finance: The strategy quickly established itself as the market's largest green bond fund, by some way. Can you explain what the fund does, and why it has proved so popular?
Frederic Samama: It sets out to tackle the non-optimal allocation of capital between pools of assets in developed markets and the needs for green infrastructure financings in emerging markets. The market is not currently working well for either party. Developed markets investors don't have access to the returns associated with developing markets, and the developing markets don't have access to the capital flows from developed markets. This makes things costly for both parties. What the fund does is create a bridge between the two worlds. It takes money from developed markets and directs it to green infrastructures in emerging markets, for the benefit of both parties.
As to its rapid uptake with investors, usually you develop a product and try to sell it. Here, it was reverse engineering. The IFC and Amundi tried to identify the obstacles the investors were facing, and the solution was developed based on that.
EF: The IFC and other development banks take some of the risk in the portfolio. Can you explain how that works?
FS: It's very simple. It's a layered fund, with different levels of risk. It includes a junior tranche, which means that if some of the bonds default, the IFC and some other development banks are impacted first. It is a way to reduce the credit risk for senior investors. It's an approach often used for leveraged funds, but here there is no leverage. It's a way to allocate risk slightly differently and make institutional investors comfortable with the emerging market risks.
The fund buys bonds with an average rating of BB+. This mechanism means the senior tranche holders have an overall risk profile more in the investment-grade area [BBB- or above].
This is more than just a deal. It's a very innovative way to transfer capital from one part of the global economy to another. It's also a new business for development banks. Their existing business model is to finance projects on their balance sheets but, because of their desire to retain their triple-A ratings, there are limits to the number, size and type of projects they can finance. Hence this new focus on mobilisation.
EF: When you were raising the fund, what questions/concerns did investors have?
FS: It was a kind of a blitzkrieg, if I can use that word. We were selected by the IFC in March 2017 to set up the structure, and the fund was closed by March the following year. So we switched from a two-page concept note towards closing the largest green bond fund in less than one year. No-one knew we could be so fast.
The questions from investors were fairly standard. Will Amundi be free to run the fund, or will the IFC make the investment decisions? There were also a lot of questions about how comfortable we were about the switch to green bonds.
EF: Why was the decision taken to allow the fund to initially invest in unlabelled bonds, only requiring it to become fully invested in green bonds after seven years?
FS: The point of the fund is to develop green bond markets in emerging economies. That's why we have this structure that invests first into standard bonds and then gradually shifts towards green bonds over the next seven years. The seven-year timeframe was to reassure investors that we wouldn't have to sacrifice returns by being forced to overpay to buy green bonds. That was a very powerful message.
In parallel, the IFC has set up a technical assistance facility that aims to help issuers issue green bonds. It's a unique approach that aims to address both demand [for emerging market green bonds] and the supply side.
EF: What are the prospects looking like for switching into labelled green bonds? Is the green bond market developing as you hoped?
FS: We are ahead of schedule. We thought it would take two years to switch the first 15% of the towards green bonds; at the end of the first year, we had done 16.5%*. And we have a diversified portfolio in terms of regions.
We've recently released two reports marking the one-year anniversary of the fund: one on emerging green bond market development and one on the impact of the fund and the overall programme run by IFC. The overall rating of the portfolio is higher than anticipated – we were anticipating BB, and its actually BB+. With our success in switching into green bonds, two of the most important criteria for the fund are performing better than expected.
For more information, see: www.amundi.com/int/ESG/Environment-initiatives
* Disclaimer, Amundi: This document is not intended for citizens or residents of the United States of America or to any "U.S. Person", as this term is defined in SEC Regulation S under the U.S. Securities Act of 1933. Amundi accepts no liability whatsoever, whether direct or indirect, that may arise from the use of information contained in this material. Amundi can in no way be held responsible for any decision or investment made on the basis of information contained in this material. The information contained in this document shall not be copied, reproduced, modified, translated or distributed without the prior written approval of Amundi, to any third person or entity in any country or jurisdiction which would subject Amundi or any of "the Funds", to any registration requirements within these jurisdictions or where it might be considered as unlawful. Accordingly, this material is for distribution solely in jurisdictions where permitted and to persons who may receive it without breaching applicable legal or regulatory requirements. The information contained in this document is deemed accurate as at 30 June 2019. Data, opinions and estimates may be changed without notice. Document issued by Amundi Asset Management, a French "société par actions simplifiée"- SAS with capital of 1 086 262 605 euros - Portfolio Management Company approved by the AMF under number GP 04000036 – Registered office: 90 boulevard Pasteur – 75015 Paris – France – 437 574 452 RCS Paris – www.amundi.com