Heartwood Investment Management, the asset management arm of Handelsbanken in the UK, launched a range of multi asset sustainable investment solutions in March 2018; and according to investment manager Benjamin Matthews, its progress has been very encouraging, with clients steadily increasing their levels of interest.
“Sustainability has been the topic of conversation for a few years, and we feel that we definitely have enough building blocks now for a multi asset strategy,” Mr Matthews told thewealthnet. “More and more investors want to align their personal values with their investment needs, and we provide these investors with access to a sustainable product at all points on the risk/return curve.”
The four strategies are globally diversified portfolios, which benefit from the investment approach of Heartwood’s unconstrained multi asset strategies. The Balanced Sustainable and Growth Sustainable strategies had been launched two and a half years ago; and when these performed as Mr Matthews had hoped, the firm added Defensive Sustainable and Cautious Sustainable to complete the range.
Each strategy aims to deliver a defined return over inflation and is run to a specific benchmark target (CPI plus) that is aligned to its risk profile. The strategies seek to achieve or outperform these targets over a rolling five-year period net of fees.
Potential investments are assessed against Heartwood’s sustainability criteria, with Mr Matthews excluding investments that “could do harm or are ethically unpalatable”. The sustainable universe includes usual sectors and concepts such as renewable energy and climate change; health and safety; education; infrastructure and community development, where Mr Matthews looks for an “optimal long term blend of asset classes”. Importantly, there is “little negative screening, as what goes into a portfolio is more important than what is left out.”
Mr Matthews stressed that the strategies have been in demand from across the demographic of Heartwood’s clients.
Looking at recent trends and developments in the sustainable sector, Mr Matthews talked about the green bond market, which marked its tenth anniversary in 2017.
“The green bond market enables companies to tap the growing pool of cash that is looking for climate-friendly investment opportunities, converting those funds into environmentally sustainable projects. Green bonds have matured to become an asset class in their own right providing investors with opportunities for risk management, scale and liquidity with sustainable finance.”
The green bond market has experienced rapid growth, particularly since 2012.
“A staggering $155.5 billion of green bonds were issued globally in 2017 compared to a mere $3 billion in 2012. Despite this, green bonds still account for less than one percent of the overall global bond market, but the composition of the universe is evolving, providing investors with a wider range of choice,” said Mr Matthews.
Although a green bond is structured like any other fixed income instrument, with a fixed or floating interest rate and a fixed maturity date; there is one key difference: the money raised is exclusively assigned to finance projects and business activities labelled as ‘green’. There is still a primary focus on achieving the maximum financial return, but this consideration is balanced by environmental objectives.
Interestingly, two years ago, most green bond issuance was coming from Europe and from multi-lateral development banks. Today China, and Asia more broadly are “stepping up to the challenge”.
“There is increasing geographic diversity in the market and a wider range of financial instruments. One of the key developments in 2017 was the emergence of sovereign green bonds. Last year France successfully borrowed EUR 7 billion to help fund energy transition projects. As well as being the largest issuance so far on the green bond market, it also has the longest maturity date and was the first by a sovereign state.”
Crucially, Mr Matthews pointed out, regulation in the market, together with monitoring and benchmarking is evolving. The Climate Bonds Initiative and the International Capital Market Association, which developed the Green Bond Principles in 2014, have helped to set some principles and standards for green bond issuers to aid transparency. However, the market is still awaiting a complete set of widely accepted ‘green’ standards to provide consistency for green bond investors.
“In 2017, several climate leaders called for a ten-fold increase in green bond investment from 2016 levels and set a target for 2020 of US$1 trillion. Green bonds have the potential to reach this target and to boost progress on national climate commitments.
“Global development needs would be met in a way that is climate compatible through financing clean energy infrastructure, sustainable transport, energy efficiency and waste management. Further growth and diversification of the green bond market remain key to achieving a sustainable future.”