AP2 creates standalone green bond portfolio citing market's 'maturity'

Sweden’s AP2 is to establish a standalone green bond portfolio, arguing the market has matured enough to warrant classifying its holdings as a distinct asset class.

The buffer fund, which has invested in green bonds since 2008 when the World Bank first entered the market, said it would implement a strategic allocation of 1%, or SEK3bn (€327m), despite having already exceeded the target through its current holdings worth SEK4.2bn.

It said the decision to establish a standalone portfolio was “strategically important”, as it would enhance the fund’s sustainable investment efforts.

Lars Lindblom, fixed income portfolio manager, said AP2 felt the green bond market had now “achieved a maturity and size” to justify the fund’s implementing a separate investment strategy and declaring it an asset class.

“We are therefore breaking out our holdings in green bonds from the fixed income portfolio, to manage them in accordance with a dedicated investment strategy,” he said.

The new approach will see AP2 use the Barclays MSCI Green Bond index, launched in late 2014, to benchmark its performance.

“This strategic move offers the Fund a clear means of combining solid returns with an allocation of resources to the global sustainability challenge,” Lindblom said.

Lindblom told IPE that, while much of AP2’s green bond exposure to date had come from supranational issuers and national development banks, the consistency of the Barclays MSCI index was “a little bit different”, leading to a gradual shift in allocation through the acquisition of corporate green bonds.

Since 2014, there has been steady growth in the number and volume of green bond issuances.

The first three months of 2016 has already seen $15.6bn (€13.9bn) in green bonds issued, according to the Climate Bonds Initiative, including a $600m issuance by Kommuninvest, Sweden’s local government debt office, and a $1.5bn issuance by Apple.

This compares to more than $36bn in 2014 and nearly $42bn in 2015.

German development bank KfW was responsible for the largest single issuance last year, a €1.5bn bond that attracted interest from AP2 and Dutch pension manager APG, signatories to the Paris Green Bond Statement.

AP2’s decision to establish a standalone portfolio comes after fellow buffer fund AP3 pledged to treble its green bond holdings to SEK15bn by 2018, while AP4 grew its green bond holdings by SEK2.9bn in 2015, ending the year with nearly SEK4bn.