Green bonds to face tough scrutiny: AXA IM

One of the world’s largest investors, with $35bn in green bond holdings, views about 30 per cent of offerings as ‘not credible’.

AXA IM has met with the Australian government to discuss green bond offerings.

Investors will be taking a critical look at the federal government’s proposed “green bonds” to ensure they are invested in sustainable projects with outcomes confirmed by regular reporting, the head of fixed income for Europe-based AXA Investment Managers, Marion Le Morhedec, has warned.

One of the world’s largest investors in green bonds, with $35bn in green bond holdings, AXA IM is one of the groups that will be meeting with federal government officials in Europe next month during a road show to promote the new bonds.

“We welcome the fact that the Australian government will be issuing green bonds,” Ms Le Morhedec said in an interview with The Australian.

“But we will need to enter into the details of the green bond issuance to see whether it is eligible (for AXA to invest in).

“The government will need to give us a lot of information about the projects they have identified so we can be assured that they will have meaningful environmental benefits.”

Ms Le Morhedec, said AXA IM, which has been investing in green bonds for the past eight years, regularly rejected about 30 per cent of “green bond” investment proposals as it was not satisfied about their credibility.

“We exclude 30 per cent of the issuances in the green bond market if we believe that a company (issuing the bonds) is not credible, or we don’t have enough evidence of their overall sustainability strategy,” she said. “We need to see that the bonds are being used for dedicated projects such as green buildings, renewable energy, low carbon transport or energy ­efficiency.

Marion Le Morhedec.

“We want to avoid issuers using the proceeds from green bonds to finance projects which are not green.”

The Australian Office of Financial Management has announced that it will conduct a four week roadshow starting in mid-April to promote the inaugural 10-year green bond issue.

It says Australia’s first sovereign green bond will mature in June 2034. It will finance projects that reduce emissions and support the government’s 2050 net zero commitment.

It has not said how much it plans to raise through its first green bond, but it is expected to be billions of dollars.

While the Australian government is seen as a credible issuer, Ms Le Morhedec’s comments make it clear that the proposed investments to be backed by the green bonds will come under close scrutiny by global institutional investors, particularly those like AXA IM with a long track record of investing in the sector.

Paris-based Ms Le Morhedec, who is also a member of the firm’s management board, said AXA was determined to avoid supporting any projects that could be seen as “greenwashing” and would harm its own reputation with investors around the world.

Executives from AXA IM met with officials from the Australian government last year to outline the group’s criteria for investing in green bonds.

Ms Le Morhedec said AXA IM was a “big fan” of governments issuing green bonds, include France, Germany, Britain and India, and believed that the was very committed to its net zero strategy by 2050.

But she said each green bond investment had to be examined on its merits, including the details and the credibility of the projects ­involved.

“We have met with the Australian government before, but we haven’t committed to making any investments,” she said.

“The specificities of the projects are what really matters to us.”

She said AXA IM’s review process included the requirement for regular reporting about the projects that were financed by green bonds.

“We want to see the impact of investments on the projects in areas such as the amount of carbon avoided,” she said.

“Our framework is more restrictive than the general green bond framework, but we want to be confident that we can showcase to our investors our capability to screen the universe and really come up with credible investment solutions.”

The global green bond market was now worth some $US2.6 trillion ($4 trillion) with more than 1000 different issuers, she said.

The market has been growing at more than $US500bn a year in recent years.

“This is a growing market which will continue to grow, with new issuers every year, including companies and sovereign governments,” she said.

Ms Le Morhedec said 42 per cent of the total bonds came from quasi-government entities, 15 per cent were issued by sovereign governments, and 20 per cent by banks and financial institutions.

Around 13 per cent came from industrial companies financing projects like electric cars and another 10 per cent were issued by utilities.

“The profile of the issuers is very diversified, which is good for fixed income investors like us,” she said.

“That fact that so many issuers have come to the market over the years gives us a lot of comfort that we can be actively managing those assets.”

She said the bulk of the investors in green bonds at the moment were Europeans.

Some 56 per cent of the total bonds outstanding were issued in euros and only 28 per cent were in US dollars.

“It gives you an idea of the investor base,” she said.

She said AXA IM would not approve proposed “green” bond investments that included airports, or any projects associated with fossil fuel, including gas.

“We have our own analysts who are looking at the details of all these issues,” she said.

“We don’t want to be reliant on issuers just calling them ‘green bonds’.”

She said AXA IM wanted to establish a larger footprint in Australia as it believed there was a growing interest in green bonds from superannuation funds and retail investors. “There are definitely similarities we see here with the Australian investor base and the investor base we already have in Europe in particular,” she said. “There is a lot of interest in ESG integrated solutions in Australia. That is one of the reasons we are coming here more often.”