BlackRock launches dedicated green bond fund after client demand

Asset management giant says fund to be run by Schulten and Wills

BlackRock is launching a dedicated green bond fund, tracking the MSCI/Barclays/Bloomberg index at the request of clients.

The UCITS fund will be euro-based – although it will include global currencies – and will be co-managed by Ashley Schulten, Head of Climate Solutions for Fixed Income, out of New York, and fixed-income portfolio manager Darren Wills out of London.

BlackRock would not disclose the size of the fund, or if any investors were committed yet, but Schulten told RI that none of BlackRock’s existing green bond investments would be moved into the vehicle.

“This is a new investment pool for green bonds in addition to what we already have,” she explained. “It was prompted by requests from a few specific clients, and we anticipate we will have further interest in the product based on the interest in the broader green bond market at the moment.”

The fund is open to both retail and institutional investors, and Schulten says BlackRock has so far received queries from pension funds, insurance companies, family offices and private banks.
As a passive vehicle, the fund follows the selection methodology of its index. This means it invests in investment-grade corporate, government-related, treasury and securitised bonds across all currencies tracked by the Barclays Global Aggregate Index.

Bonds are screened by MSCI for environmental quality, and MSCI will engage with issuers if it feels more transparency is required before inclusion. These deals will be put on a ‘watch list’ during engagement, while others will be excluded completely if they do not meet MSCI’s environmental criteria.

There are 17 labelled bonds currently excluded from the index, including Starbucks’ 2016 sustainability bond, Unilever’s 2014 green bond and the Development Bank of Japan’s 2015 green bond.

It accepts fixed-rate coupons only and holds bonds until maturity. The minimum size of green bonds is now $300m – up from $250m previously – following a change this year to the broader methodology of the Barclays US Aggregate.

“I’m all for making green bonds a part of the investment universe for clients, and larger deal size and liquidity help with that,” said Schulten. This threshold (which is unusual for green bond indices, as most don’t currently have a minimum inclusion size) will screen out a lot of outstanding green bond deals, Schulten concedes, but there will be sufficient supply of larger deals.

“The conversation around a lack of supply for the green bond market is last year’s conversation. We’re up to $200bn now, and it keeps growing.“There is more interest from issuers, who are now a lot more comfortable with investor expectations, and many have taken their time lining up whole programmes. The involvement of sovereign issuers is already helping to scale up the market. So the projections of at least another $100bn in 2017 will probably play out.”
In addition, Schulten told RI, discrepancies between supply and demand will be partially self-correcting: if demand outstrips supply then it will create a pricing tension and that will incentive supply. “I’m happy for pricing tension – I think it’s healthy for the market.”
In terms of hopes for the green bond market, Schulten said it was crucial to “drill down to defined standards, so that the green bond label means something and that it becomes easier and easier to feel confident about the environmental benefits you are financing”.
The integrity of the market has been strengthened, she added, by a market-wide “education process”. “Not only are issuers becoming more comfortable about what is required for a ‘true’ green bond, but there’s been a knowledge transfer between the established, experienced green bond investors and the wider investment community. And investment banks are much better versed around what ‘true’ green bonds are.”

The launch comes just days after BlackRock announced it would make disclosure on climate risk a priority of its engagement programme over the next two years. “BlackRock, as a fiduciary investor, undertakes all investment stewardship engagements and proxy voting with the goal of protecting and enhancing the long-term value of our clients’ assets,” the investment giant said in a statement, identifying five key areas for engagement in 2017 and 2018.

Schulten told RI that the announcement was separate from the launch of the green bond fund, but “part of the same idea that climate change is a potential financial risk to investments”.

Although the risk of most green bonds sits with the issuer, and therefore is not linked directly to climate change, Schulten said they were still instruments to deal with long-term risk. “There are a couple of ways of looking at climate risk as an investor. There is what might be shorter-term portfolio risks linked to regulatory risk or technological risk, for example, which could affect some companies through carbon prices or changes in revenues. The investor in green bonds, however, is thinking about the longer term: what risk does a business-as-usual emissions trajectory, or a planet suffering the consequences of not investing enough in tackling environmental degradation, pose – what are the long-term impacts on my investments.

While both of these perspectives are considering environmental risks, there is just a difference in time horizon and an element of impact in the second viewpoint, which changes how you assess climate risk.”