Demand for green bonds and sustainable investment products is increasing among Hong Kong institutional and retail investors, but there are not enough such products to meet the demand.

“We’re seeing a lot of interest in green bonds from Hong Kong investors in general, whether institutional or retail,” says Kerry Ching, chief executive officer of Amundi Hong Kong. “For example, in the first six months of this year, January to June, we’re seeing the statistics in terms of gross sales on ESG funds have actually doubled from last year, a very clear message to the market that investors are really looking for them.”

Twelve of the 64 ESG funds available in the market at present were approved for distribution in the first six months of this year. A total of US$288.7 million was invested in ESG funds in the first five months of 2020.

 “In the last few months, various organizations have done or conducted different types of surveys, gauging investors’ interest in ESG or green type of investment, and most of the survey results indicate that investors are increasingly interested in ESG investment but there are not too many of those investments available in the market,” Ching says.

According to recent surveys, 80% of fund managers in the region believe that providing sustainable investment products will be very important to their clients in the next five to ten years.

“When we were thinking about how much of our assets we’ll be investing in the ESG area by 2025, most of the fund managers think that ESG assets would be about 15% of their AUM by 2025. At Amundi, we are at the forefront since we are managing more than 15% of our AUM in that particular area,” Ching says.

Country risk

When it comes to investing in green bonds in emerging markets versus developed markets, country risks and credit analysis are key elements which investors should look at.

“In terms of the risks investors need to be aware of, country risk is quite important, but because we are dealing here with predominantly corporate issuers, then the credit selection and credit analysis, bottom-up analysis, are actually key to the investment process,” says Maxim Vydrine, co-head of Emerging Markets Corporate & High Yield Debt at Amundi.

“It’s important to get the country right but it’s even more important to make sure that your investment in individual issuers makes sense, and that’s something that we have been doing for years.”

Regarding ESG and greenwashing, there is the issue of whether the standards used for green bond issuers from developed markets should be applied to those from emerging markets, considering the difference in their level of market development.

“It’s a very good question, whether you should apply different standards to emerging markets versus developed markets, and the answer is no,” Vydrine says. “For us the approach which we take is exactly the same where we analyze developed markets versus EM markets, and it’s implemented by exactly the same team using the same tools and using the same process.

“Maybe the only one point I’ll make, emerging markets because it’s a newer asset class and maybe some of the issuers, because they’re new issuers, sometimes it just makes it more difficult for them to have all the answers really straight away for the investors, but they’re getting increasingly better at it.”

EM opportunity

From the sustainable investment perspective, there is more opportunities for investors to engage with issuers of green bonds in emerging markets and to be able to make a difference.

“Our ESG analysts are working a lot on engaging with issuers and helping them to improve, for example, their impact reporting and making sure it’s to the best standards,” Vydrine says.

Meanwhile, Amundi Hong Kong announced that Amundi Funds Emerging Markets Green Bond has secured approval from the Securities and Futures Commission of Hong Kong, making it the first SFC-authorized green bond fund dedicated to emerging markets. The Luxembourg-domiciled fund will be available to retail investors in various share classes with monthly dividend distributions. The fund is also on SFC’s green and ESG funds list.

The fund invests a majority of its assets in emerging-market green bonds and offers diversification across countries and sectors. It invests primarily in corporates from a range of sectors that include utilities, real estate, banking, basic materials and transport across EMs such as Brazil, India, China and Indonesia. The fund also has some flexibility to invest in sustainable bonds, whose proceeds can be used to finance both environmental and social projects.

It aims to benefit from the growth of the EM green bond segment, which is expected to deliver higher yield potential than developed market equivalents.