Last September, London-based fund manager Mondrian launched its first ESG fixed income product, the Global Green Bond Fund. In this exclusive interview manager David Cudmore talks about the importance of sovereign issuance and what’s next for the green bond market.
Why have you launched a green bond fund?
It fits in very well with how we manage our other funds, particularly the global aggregates strategy, which is a mix of government bonds and credit corporate bonds. Also, green bonds are quite specific – there are some areas of ESG in the investment world that can be a bit grey with lots of different opinions on what’s right and wrong, and what people want, so in terms of launching a product in that space, although those questions still exist, we feel we’ve been able to bring out a product that is a true green bond vehicle.
Can you give some example holdings?
The German government issued last year, and two of those bonds feature in the portfolio. We also have France and the Netherlands in terms of sovereign issuers on the fund, and our corporate exposure is broadly split between the eurozone and the US.
We hold a number of banks, and quite a diverse range of corporates in the US including Apple and some of the US utilities. We also hold Toyota, which has issued a green bond that supports its finance arm in lending out for its hybrid or electric car purchases.
Top 10 holdings
|France O.A.T. 1.75% 25-Jun-39
|Tennet Holdings 1.375% 26-Jun-29
|Gaz De France 3.25% 28-Feb-25
|Berlin Hypo AG 1.5% 18-Apr-28
|S.N.C.F 0.75% 25-May-36
|DNB Nor Bolikreditt 0.625% 19-Jun-25
|HSBC Holdings 1.5% 04-Dec-24
|Export-Import Korea 0.829% 27-Apr-25
|Netherlands Govt 0.5% 15-Jan-40
|Bco Bilbao Viz Argent 1% 21-Jun-26
What is your investment process?
We carry out analysis in house, it’s probably the most resource-heavy area of the green bond fund. We use green bond index Bloomberg Barclays MSCI ESG index as a starting point.
We need to be comfortable the proceeds are genuinely funding environmental projects, so largely for this we are reliant on what the issuer produces in terms of information and analyse their framework. Ideally, we want external firms such as Sustainalytics or S&P to provide a second opinion on the framework and the whole green bond structure. Usually, there will be some kind of audit about where the actual cash proceeds go, and again that’s a positive thing we’re looking for.
The final step is impact reporting on green bonds – it’s the toughest area data-wise for issuers and ourselves; it’s complicated to say ‘this is how much emissions we’re saving on this’ or ‘this is how many car journeys we’ve saved by improving this transit system’ and so on, but it’s that real data and real effect that investors are actually interested in.
Why would a bond be excluded?
The reporting is the only information we have available to us, so if we find that reporting to be vague or generally poor then it just leaves too many question marks. Anything to do with fossil fuels at a very basic level we would veer away from. Issuers can change their frameworks and update them, issuers will react to comments and criticisms or feedback so we don’t ever red flag an issuer. We also don’t have any transitional bonds on the fund at the moment.
What is the future of the green bond market?
The market clearly has huge momentum behind it. Reputationally, the issuers want to be seen to be doing the right thing, green bonds are a very obvious and transparent way for them to signal to investors that they’re taking environmental standards seriously. We’re getting a broader range of issuers coming to the market now.
One of the big concerns is greenwashing and that’s going to continue for a number of years. Those doubts are about how green are green bonds between different issuers, different countries and regions, I don’t think there are any easy answers to that.
What’s most important to sustain growth is sovereign issuance, and outside Europe it’s been surprisingly slow. Lacking a sovereign green bond holds back a market because once you have the sovereign issuing it really draws all attention to the green bond, what they’re doing, what standards they’re setting, and then really directing their policy towards environmental concerns so they’re almost dragging up the region, setting the standard and showing the way forward.
We don’t need sovereign issuance to create global acceptable standards or even regional standards, but it would be so helpful. That’s something the EU is doing at the moment, the EU will be bringing out an EU bond standard that will lay out the principles of what this institution says is an acceptable green bond.