AXA Investment Managers has called for a new type of bond to help carbon-intensive companies move away from fossil fuels, a role it says the green bond market should not be asked to play.
The €729.8bn asset manager said “transition bonds”, as it dubbed the proposed type of debt, were necessary for those companies that would struggle to credibly issue green bonds because they operated in greenhouse gas intensive industries or did not currently – and for the foreseeable future may not – have enough green assets to finance.
It said that “transition bonds” would be used by companies solely to finance certain projects, such as carbon capture storage, co-generation plants or gas transport infrastructure that can be switched to lower carbon intensity fuels.
They would help investors overcome “the major challenge of providing capital not just to companies which are already green, but to those which have ambitions to become so,” the asset manager said. According to AXA IM, the green bond market should not be called upon to facilitate this.
Yo Takatsuki, AXA IM’s head of ESG research and engagement, said: “Transition bonds would allow the quality of the green bond market to avoid being diluted by issuances where the environmental benefit of projects being financed is less clear.”
He added: “We believe green bonds must remain a market which prioritises ambition, quality and integrity. It cannot be undermined by secondary concerns.
“The creation of transition bonds will help maintain the level of quality of the green bond market while offering a source of financing for the other activities necessary for the technological and energy change that will perpetuate the advent of a low carbon world and economy.”
Insight laments green bond ‘bolt-ons’
AXA IM’s call comes after Insight Investment, one of the UK’s largest fixed income managers, reported that many green bonds or other “impact” investments were not meeting its minimum standards for sustainability.
In its 2019 responsible investment report it said 10 green bonds had fallen short of its basic expectations this year, up from one in 2018.
There was a “pressing need” for greater alignment between the objectives of impact bonds and issuers’ strategic interests, it said.
Too many impact bonds were “simply bolt-on sustainability programmes, quite separate to the ongoing activities of their issuers’ day to day businesses”, said Josh Kendall, senior ESG analyst at Insight Investment.
“It prompts the question: how authentic are these bonds? We want to reach a point where there is no distinction between a bond’s impact objectives and its issuer’s core operational activities.”