Lyxor Head of ETF Strategy, ESG and Innovation François Millet, and Manuel Adamini, Head of Investor Engagement at the Climate Bonds Initiative, discuss why Climate and ESG investments proved to be so resilient through the Covid-19 crisis.
Sustainable investment flows have held up remarkably well in the context of the Covid crisis and ESG ETFs in particular have had a very strong run. What is your take on this?
François Millet: ESG ETFs raised € 10.6bn in Europe at end-May, a record so far! They showed themselves to be long-term winners, and demonstrably resilient in the short-term. This is because they display style biases towards large caps, towards so-called ‘quality’ companies (distinguished by the strength of their balance sheet) and towards lower volatility securities, three factors that have served to mitigate the upheaval we’ve seen in markets. At Lyxor we saw continued positive flows in our ESG ETFs in March, against a backdrop of massive outflows in the global ETF market. Our European equity ESG ETF and global Green bond ETF in particular received a lot of attention. This resilience through the Covid crisis had the effect of reinforcing clients’ intention to take their ESG allocation to the next level, or triggered wait-and-see investors to switch into action. Investors see ETFs as great tools for sustainable investments because they are, by their very nature, transparent, simple and rules-based – characteristics that align well with ESG priorities. I also think the pandemic has made investors acutely aware of how dependent our human societies are on the fragile balance of nature, thus prompting fresh appetite for ESG and climate-focused investments in particular.
Do you expect the Green Bond Market to expand as a result of the Covid crisis?
Manuel Adamini: Before the Covid-19 crisis hit, we at the Climate Bonds Initiative expected the issue of Green bonds to reach $ 350bn by the end of 2020, a huge increase from $ 257.7bn in 2019. And while some – not all – market observers have lowered their forecasts, we remain optimistic. As François points out, The Covid crisis has made it absolutely clear how much our own fate is intertwined with the ecosystems around us, and for the need to strengthen the resilience of our economies and societies against future climate shocks. The established Green Bond market infrastructure made it easy for the market to pick up Covid-19 bonds with confidence. This has cemented the idea of themed bonds into the mainstream, which will support more green and climate bond issuance going forward. There is strong support for this momentum at central bank level. In Europe, Christine Lagarde has made it clear that the ECB has a very important role to play when it comes to climate finance, and has made climate risks a central issue in the ECB’s ongoing strategic review. Indeed, the ECB has already purchased green bonds in the past as part of its QE program and could well do so again in the future. What’s important is that the greening of the financial system is being discussed, and we are seeing encouraging acceleration.
Why are ETFs an attractive vehicle for climate investments such as Green Bonds?
François Millet: ETFs are transparent by design. Investors can easily see how indices are constructed, and this information freely available online. Current frameworks like the Green bond principles, the Climate Bond Initiative Taxonomy, alignment with the future European Commission Taxonomy, and third party opinions, provide an additional level of comfort on transparency. For equities and corporate bonds, the new EU labelled Climate indices (EU Climate Transition and EU Paris-aligned benchmarks), leverage on the power and transparency of indices. And given the very prescriptive portfolio construction framework set by the European Commission for climate indices, the sheer amount of data needed, and the necessary science-based method to achieve decarbonization and temperature alignment, a disciplined and quantitative approach through rules-based ETFs seems a particularly appropriate solution.