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Sustainability in the Spotlight

Thomas Archer joined Nikko Asset Management in 2014 initially in a support role for the EMEA Sales Team. He subsequently moved roles in 2016 to become the Product Specialist for the Global Fixed Income investment team based in London with a specialized focus on the company’s green bond portfolios. Before Nikko AM, Thomas was previously at Henderson Global Investors and received his undergraduate degree from the University of Leeds in Economics.

Nikko Asset Management has been carbon neutral since September 2019 – the firm shares its sustainability efforts and progress on the dedicated corporate sustainability part of their website. During the Covid-19 pandemic, their annual Foreword conference in Singapore was run as an all-virtual event in 2020. Supporting their carbon neutral position, they were able to highlight at the conference how much carbon was being saved by running the event online instead of in-person.

A key part of the company’s global business council and leadership roles is to push ESG efforts across the board. At Nikko AM in Europe, they are at the forefront of that, with the fixed income team that Tom works with; they also have a global equity team in Edinburgh. ESG as a concept is more developed in the European marketplace, so they use the European teams’ experience and expertise across several working groups. A differentiator for Nikko AM is to be part of the positive feedback loop of being in the major league of green bonds in Europe and bringing this expertise to Asia, where the green bonds markets is a bit further behind in comparison.

In the London office and all Nikko AM offices globally, there is a sustainability group that helps develop and drive local charities and initiatives. At Nikko AM in London Green bonds are front and center for ongoing communications and marketing efforts, too, regularly engaging with the media to provide insights into green bonds and the wider ESG agenda. It’s vital to the future growth of the company to walk the walk every day.

Understanding Green Bonds and ESG Investment

The green bonds market started in 2007 – it reached over $1 Trillion in 2020. The market is growing, and the types of participants have developed. Financial corporates and non-financial corporates are now operating in this space, as well as sovereign issuance now coming into play. Green sovereign issuance has come into the market and being actively bought by investors.

Thomas is passionate about green bonds and developing sustainable investments. “What’s exciting about green bonds is seeing real change in what you’re buying and the future impact of what the proceeds are going towards. You see real change with what you’re doing, real life examples coming to life through investment products. You also see the wider investment community coming together towards combatting climate change and you can work with investors to achieve change in this way.”

Is it about returns or sustainability, or both?

It’s up to the asset manager to come up with products that suit the investment goals of clients – demonstrating a breadth of products. This can vary from greater returns, to greater demonstrable sustainability and that being at the forefront of their agenda. It’s up to asset managers to come up with a portfolio of products that fit those needs.

Thomas says, “The fixed Income market is close to $100 Trillion, with green bonds only $1 Trillion. Asset managers have to listen to investors and appeal to what they want. Working for investors, that needs to be clear at the start of the investment agenda, making sure products fit their needs. One of the key things to keep in mind when managing money, even from an ESG perspective, is that there is still investment return behind that – it’s important to understand and meet that obligation.”

Nikko Asset Management launched the world’s first dedicated green bond fund in 2010. Because Nikko AM had been in the green bonds market from the beginning, they were able to combine products for clients. This credibility helped in working with issuers and corporates to get the ESG agenda and stewardship right at their end, too.

Identifying ESG opportunities

“There are a plethora of indices out there saying they are greenest,”, Archer comments. “They are part of the toolkit you can use for green ticks in the box. But you need credibility in the market and knowledge of the marketplace to be able to delve deeper and see the opportunities.”

One recent example is a Canadian hydro-electric issuer that supplies 100% hydro-electric power within Canada and parts of the US, but because it was not specifically listed as a green company by some indices, investors might not know about it as an ESG investment opportunity. Archer observes, “You need to be able to sustain a constant dialogue to make sure investors know what’s available and what’s feasible to add to the portfolio. To do this, traditionally you would look at the company financials: how healthy are they, are they likely to default? When buying new paper, it’s just as important to do more detailed ESG research.”

“Take an oil company, for example. We won’t say we’re not buying bonds from them just because they are traditionally in oil, we will look at the story, see what they are working on now – conducting in depth research to find sustainable opportunities even if these are not in the more mainstream ESG categories – if they are embarking on ESG initiatives, it all works towards our collective climate change goals.”

Nikko Asset Management also has a dedicated data scientist internally, who is looking into the ‘green-washing’ element of corporate bonds in the green bond indices. It adds a valuable additional layer of due diligence. Through data and machine learning research, they have been able to identify 20 different variables where data is available, creating a quantitative research score for when buying bonds into the portfolio. This adds further credibility when researching and buying bonds.

Better returns?

Equity portfolios have seen a big push on the ESG side, with growth in performance. It’s too early to say from the fixed income side if that is the case. The main benchmark is the Barclays Global Agg (The Barclays Global Aggregate Index). “We feel we can build a portfolio on green bonds, sustainability bonds, water bonds – a very ESG focused portfolio – and beat the Global Agg,” says Archer. “If your mainstream bond indices and bond allocation is against the Global Agg, we feel the market is now developed enough to be able to buy different sustainability-type bonds and beat the Global Agg and the mainstream benchmarks.”

Greater impact with real returns

“It’s one of the reasons why I’m passionate about helping to manage and helping to pick a green bond portfolio, because you really do see the change.”

“The main UCITS fund we use, the Nikko AM Global Green Bond Fund, is a AAA-rated product – we are able to buy green bonds from global SSA issuers and that performance has matched up well against the Barclays Global Agg. We’re buying the highest rated bonds out there in the market with a greatly green agenda, able to closely match the Barclays Global Agg return. That’s quite a compelling story. Taking that very high credit rating portfolio and ultimately creating the benefits that come into the portfolio becomes very compelling. How we link that with infrastructure, how we link with UN SDGs, how you see the real impact of the projects that are being built with the proceeds – it’s something that’s really important for us and brings the portfolio to life in a way that a standard fixed income portfolio might not.”

Working together to meet global goals

“You really see the investor community coming together for this. It’s not just asset managers: it’s banks, sovereigns, issuers, all coming together to try to find ways to combine and act – and this is the point I want to stress – to be a capital allocator and to help meet the goals set at the Paris Accord; to hit a huge number in terms of trillions of dollars. The only way to be able to do that is to be able to combine ideas across the investment community and make projects and get sufficient funding to meet those goals.”

Steps in the right direction

“The UK is a bit behind in terms of what some sovereigns and companies are doing at the moment. It’s a very positive step and the first of what are likely to be many announcements from the current government leadership in terms of meeting the green agenda, a great step forward, but if you look at Scandinavia, the Netherlands, for example, they are a couple of years ahead in terms of where they are on their green journey, especially Scandinavia. More importantly, the EU and EIB have done a significant amount of work in creating the regulation around the green bond market in Europe and they are leading the way in terms of transparency of why the green market is needed, what it’s designed to do. They are the entities we want to be purchasing green bond paper from.”

Transparency and accountability

“What’s important to us is definitely the right story. When we see large scale infrastructure projects, that’s what we like to buy in the portfolios. A clear reporting agenda is just as important for us and if we feel that an issuer isn’t necessarily doing something as they said from their initial prospectus, then we would choose to speak to them and potentially take out their allocation as a result.”

What’s important for the future of the market is developing this reporting function, Archer reiterates. “A new credit analyst has to look at the financials and ESG reporting part of any issuer releasing green bonds. Making sure it’s verified – this is really important for the future growth of the market. It’s only ever going to help investors to get a real understanding of a clear X and Y from their investment. Significant due diligence into each of these entities and strict research agendas are vital. That comes from our fixed income team’s experience in the market, which is as important as anything else.”

The future of the green bonds market

It all comes down to a genuine passion for sustainable investments and growing that marketplace to achieve collective climate and sustainability goals. “Yes, you have to have the combination of the fixed income and the sustainability, but you have to show an interest and a passion for that – companies and asset managers will have to come together to do that to get the future assets that are going to be put in the portfolios and grow the future of the market.

Listen to our podcast on ‘The state of innovation in 2020s: Reimagining social impact and sustainable growth’.

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