A green opportunity, but at what cost?

Green bonds have grown in prominence over the last couple of years, with a company’s ESG (Environmental, Social and Governance) credentials assuming ever-greater importance for investors. The terminology used to describe green, or ethical, bonds – and the definition of investing ethically – can often be interchanged to such a degree that the end investor is left with an incorrect understanding of the difference, and perhaps a lack of appreciation of the risks.

Dedicated green or ethical bonds are sometimes issued by established blue-chip corporates (e.g. Lloyds and SSE have issued green bonds in recent times); the proceeds of such issuance is essentially ring-fenced by the issuer to fund socially responsible or environmentally-friendly projects. Liquidity in instruments issued by such well-established entities is typically as deep as would be the case with the rest of such an issuer’s capital structure.

Unfortunately the same liquidity is rarely as prevalent in green bonds issued by unlisted entities, regardless of how “green” the opportunity may be. The substandard issue size of such bonds (very often less than £100m outstanding), combined with the lack of disclosure limits the scope that such bonds can be bought or sold in the secondary market. It is this trade-off between maintaining liquidity in an investor’s portfolio, whilst maintaining their overarching desire to fund responsible and environmentally-friendly businesses that perhaps deserves greater attention than it is given.

One avenue that facilitates an efficient combination of the dual requirements of investing ethically without compromising liquidity is to invest in an ethical fund. At Kames we have managed ethical portfolios since 1989, with an independently administered “dark green” screen in place to ensure that the portfolio’s investments are consistent with the expectations of our client base. The end investor has regular disclosure on the nature of the fund’s exposures, whilst they can also sleep well in the knowledge that their investments have daily liquidity.

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Prime time to checkout Amazon?

Amazon is a company that polarises opinion in the investment world. It has been variously described as the biggest not-for-profit organisation in the world to one that epitomises the new technology world we live in, a company that is at the vanguard of the equity-market-favoured “FAANG” quartet (comprising Facebook, Amazon, Apple, Netflix and Google).

Whilst there can be no disputing the incredible equity market performance it has exhibited this year (the equity is up more than 30% in 2017), it is fair to say that the credit rating agencies also have sharply differing views too – in their case on creditworthiness. It is not uncommon for Moody’s and Standard and Poor’s to perhaps differ by a notch or two in their assessment of an individual credit, but it is rare for them to diverge by four notches as they do in the case of Amazon. Moodys rate Amazon at Baa1, with Standard and Poors assigning one of its highest ratings for a corporation at AA- .

As part of its ongoing strategy to be a one-stop shop for all consumers, Amazon recently announced its intention to acquire Whole Foods Markets Inc, a takeover that would give the e-commerce giant more than 460 physical stores. This week saw the company issue a multi-tranche (7 dollar issues) deal to raise $16bln and help finance this acquisition. We viewed the 10 year tranche, initially to be priced at 110bps over the underlying US Treasury, as good value relative to the secondary market curve. However, spill over from equity market enthusiasm ensured the deal finally priced at spread of 90 over for Treasuries. A stretch too far for us; the deal left investors with little value and Amazon with a very competitive cost of funds.

The Amazon example is very representative of our investment style; we try not to be too dogmatic in our assessment of individual credits; we look to buy good investments, which is not always the same thing as buying a good company. We will leave “not for profit” investing to the experts – like Amazon.

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