Konstantin Boehmer on sustainable debt

(Runtime: 10 min, 50 sec)

Text transcript

Matthew Schnurr:

This podcast is for informational purposes only. Information relating to investment approaches or individual investments should not be construed as advice or endorsement. Listeners should seek professional advice for their situation. Welcome to the Mackenzie Investments Podcast. My name is Matthew Schnurr, and I’m delighted to be here with Konstantin Boehmer. Konstantin co-leads our fixed income team at Mackenzie that manages over $40 billion. Konstantin, welcome back to the podcast.

Konstantin Boehmer…:

Hey, Matthew. Thanks for having me again.

Matthew Schnurr:

Wanted to start today’s discussion by talking about sustainable bonds. I know that you have a deep experience with sustainable bonds, starting, of course, at being that you’re a German native and the advancement that Europe has in sustainable investments. Also, you’re the manager of the Mackenzie Global Sustainable Bond Fund. Maybe we can start with some basics. What is a sustainable bond, and how are they used?

Konstantin Boeh…:

Sure. So, sustainable bonds are now actually a quite large part of the fixed income universe. And I would say, traditionally, they’re now classified as anything that is labelled as sustainable debt. So, there is a label that those bonds are getting from third-party companies, and they are labelling debt under a banner of either green or sustainable or social, so the different kinds of bonds, which all fall under the umbrella of sustainable bonds. But the core principle is that they are labelled by a third party. And those bonds are not any different in terms of the riskiness that one has to look at them. They carry the same risk, the same credit risk as non-labelled debt. So, one company could issue a bond, which is labelled green or labelled sustainable debt, but that same company could also issue a bond, which is not labelled and is just for general purposes.

So, the credit risk of those two instruments would be exactly the same. The only difference is that the proceeds of that bond are earmarked for special areas of their business, which are either in the E, the S, or the G category, and are therefore promoting doing good in that sense.

Matthew Schnurr:

That’s great. And just so…the E, S, and G is environmental, social, governance. Maybe we can get into more tangible examples of this. I know that green bonds is something that I hear a lot about, clearly a focus there on the environmental. And when I reflect on what the world has signed up to, as far as climate change goes, certainly it’s going to require a huge amount of investment to rebuild a lot of the infrastructure. What role does green bonds play in that sort of transition?

Konstantin Boeh…:

Yeah. So, I think they play a tremendous role because this, as you correctly said, there is a lot of money required to achieve that transition. And usually, when big amounts of money are required, fixed income is the area that will foot the bill, and that is providing most of that financing. And I think we’re currently faced with the trilemma also on the energy transition. And it’s not only the energy transition, but energy is currently at the forefront because we’re looking at security, affordability, and, of course, sustainability in the way that we are providing energy to the citizens and to the industries around the world. And a lot of those aspects are a challenge right now.

And what we see is that there’s quite a lot of investment actually going on. So, incoming data suggests that there’s a surge in investments in the energy transition space. China has done impressive proposals in terms of what they’re planning and starting to engage in. I think it’s 150 nuclear power plants; investments in wind energy quadrupled last year. So, there’s meaningful stuff happening. And it looks like this year, so 2022, we’ll see transition investments. And that is an energy place is probably 70% or so of that, will breach probably $1 trillion for the first time, and that number has doubled over the past four years. So, the total transition investments were around $500 billion, just four years ago. But in order to complete the decarbonization plans by 2050, we probably have to double that amount at least twice in this decade.

So, there’s a lot more that is needed, but at least we’ve seen an acceleration in the past couple of years, with this year being probably the one where we are breaching the $1 trillion. That is a really good sign that the momentum is picking up. And most of that will be financed by fixed income. So, last year, we had $1.6 trillion, $1.64 trillion in sustainable debt issuance, and roughly half of that was for the global transition investments. So, if you think about it, so last year, we were probably close to $800 billion in transition investments and the other $800 billion would be for other purposes. But that is, I think, a very important figure, because we need to bring that number up, and investing in funds that are actively engaged in that space is probably a meaningful step to help with that transition.

Matthew Schnurr:

That’s great, Konstantin. So, sounds like it’s a vehicle that helps this great energy transition, which is required for us to meet our climate goals. Second piece of that, that you mentioned, the universe is growing fairly substantially. So, there’s room for active managers to be selective on the different bonds. One question that I have is, the characteristics of a sustainable bond product—be it an index, be it a fund—how similar is that to a general broad universe bond product?

Konstantin Boeh…:

Yeah, good question. So, I think they’re getting much closer over time. If you would’ve asked me that same question five years ago, when we launched our first mandate, there was not so much available to us that we can pick and choose from. So, it really was a clear focus on energy companies or lots of solar wind in general, renewable energy companies, which were issuing bonds. So, if we wanted to, and we did it, we put together portfolios at that time, but there was a distinct difference in terms of sector allocation and in terms of the broad exposures that the market offers. So, that has changed over time. And we’re getting much closer to something which looks more comparable to a global benchmark or something that people, as global fixed income investors, are more used to.

And part of that is that it started off with companies and countries dragging their feet a little bit, but with a recent issue also of Government of Canada and many other governments around the globe, it becomes more of a global fixed income feel that you can actually make the same duration trades that we do for our regular funds. We can shift between different asset classes. So, there’s a lot more potential now in that space. But I think for us, as managers, we want to do good—and especially in those funds—but we also have to look after, of course, our investors.

Matthew Schnurr:

Sure.

Konstantin Boeh…:

So, we supplement a lot of the label debt that I’m mostly talking about here, so, dedicated labelled investments, which have that ticker of being a green bond or a social bond. But we supplement those bonds with some best-in-class securities, where we just scan the corporate world or the sovereign world and look for really good companies in the ESG space and really good countries who are doing all the right things, but they don’t necessarily have issued those label debts. So, we supplement our fund by those good investments as well, and that adds then another layer of flexibility that we can use to make the asset allocation and macro-decisions that we would like to express in our funds.

Matthew Schnurr:

Konstantin, great summary of the sustainable bond universe. Thank you very much for that.

Konstantin Boeh…:

Yeah. Well, my pleasure. Thanks.

Matthew Schnurr:

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