Green bonds: demand for ethical investment on the rise

Swedish investors are among the committed pioneers of green bonds. To find out why and get an institutional investor’s view of this investment product, the NIB Newsletter interviewed Ole-Petter Langeland, an asset management expert from Sweden’s Second AP Fund (AP2).

AP2 is one of five buffer funds within the Swedish pension system and one of the largest pension funds in Northern Europe. Assigned by the Swedish government to maximise the long-term return on assets, the fund manages about SEK 300 billion (EUR 32 billion). Since 2008, AP2 has invested in green bonds that finance projects aimed at mitigating climate change. The fund’s investment in green bonds exceeds SEK 3.2 billion (EUR 340 million).

“AP2 embraces environmental, ethical and governance issues among all asset classes and believes strongly in the value created by focusing on sustainability issues”, says Ole-Petter Langeland, who is responsible for managing the fund’s portfolio of fixed-income investments.

“Investing in green bonds is a way to express this within the fixed-income universe. According to our mandate, we should take ESG factors into consideration when investing, but not at the cost of the return from the investments.”

In order to accommodate green bonds in its portfolio, the fund did not have to change its investment strategy.

“We do not have any dedicated funds allocated to green bonds. They are included in the broad bond portfolio”, Mr Langeland continues.

“The fund invests in green bonds from issuers who we are already familiar with. We simply replace their ‘normal’ bonds with green ones when we have an opportunity.”

Swedish investors are showing active interest in the ethical and environmental aspects of projects they are investing in. This has made them a target group for many green bond issuers. Mr Langeland explains this with Swedish investors’ early involvement in shaping the new product.

“We had our say in the early stages of this development. The Swedish bank SEB, which was at the helm of the process, initiated and maintained a close dialogue with potential investors such as us. I also think that sustainability issues are very important for Swedish investors overall”, he says.

The success of green bonds as an investment product is possible thanks to the increased awareness of environmental issues among both investors and issuers. The size of the global green bond market is estimated at some USD 60 billion, mostly issued by international financial institutions, including the World Bank, the European Investment Bank and NIB.

“We have come a long way from a few years ago when the new product was introduced. These investments—in renewable energy, energy saving and environmental technologies—have a real material impact on our carbon footprint”, Mr Langeland continues.

“Maybe many of these investments would have been made anyway—with or without green bonds. But if a green bond investment produces a better result from the sustainable development point of view, this is a great achievement. Green bonds are not just a marketing gimmick.”

Mr Langeland is convinced that the green bond market will continue to grow in years to come. The market will mature and define a common understanding of the product and standards for impact reporting. New issuers, different maturities and better liquidity in the secondary market will attract more investors.

“More clients will demand that their asset managers invest in green bonds. Benchmarks and dedicated funds will boost this development”, he says.