Franklin Templeton Bets ECB Will Buy Bonds of Not-So-Green Firms
(Bloomberg) -- David Zahn doesn’t know what the future of the European Central Bank’s green bond purchases will look like, but he’s betting policy makers won’t exclude companies that are still transitioning to more sustainable models.
In addition to government debt, the head of European fixed income at Franklin Templeton, which oversees $1.5 trillion in assets, has bought bonds of industrial companies and banks. Among the top holdings in the 108 million-euro ($128 million) fund are French public sector rail company SNCF, HSBC Holdings Plc, Intesa Sanpaolo SpA and Telefonica SA.
“We buy green bonds but we also buy companies that are actually working on the energy transition and will make an impact,” said Zahn. “I would expect that the ECB would be more forward looking like that.”
The ECB said this month it will tweak its corporate bond purchases to incorporate climate change criteria. Yet the form of this change remains uncertain, with the central bank currently not publishing how much of its 286.5 billion-euro corporate purchase program is invested in green and so-called brown securities.
The ECB’s move follows a plethora of green rulebooks by governments and similar shifts by central banks around the globe, including a pledge from the Bank of Japan to buy green debt using its foreign reserves.
Investors see these changes as the next big driver of environmental, social and governance markets, which have grown exponentially. Sales of ethical bonds in Europe have reached 270 billion euros so far in 2021, smashing previous full-year records, according to data compiled by Bloomberg.
But without clear guidance, investors such as Zahn are left guessing how best to position their portfolios to benefit from shifts in policy.
Companies around the globe are moving toward greener business models to meet government targets to reduce greenhouse gas emissions. Banks are under pressure to reduce the carbon footprint in their loan books and face ECB stress tests on their climate vulnerability, while power hungry tech and manufacturing companies are investing in renewable energy.
The issue of supporting polluting industries has been controversial within the European Union, which left out natural gas and nuclear power from its first classification of green investments, or taxonomy. Zahn holds nuclear power producer Electricite de France SA, plus Denmark’s Orsted AS, which transitioned from being an oil company to the world’s biggest developer of offshore wind farms.
Sustainable bond sales by oil companies and others relying on fossil-fuel demand have been rejected by some ethical funds, while the ECB has come under fire from activists for buying debt from firms such as Royal Dutch Shell Plc and Total SE.
Airports have been among the most controversial of green bond issuers. How the ECB addresses what is green in the economy will become a major driver for corporate debt spreads, Zahn said.
“That would make a big impact for dirtier industries because we will have clarity on if the ECB supports them because they are transitioning, or if they will only stand behind assets that are already green,” said Zahn, whose fund, up 1.76% over the past year by end-June, holds Aeroporti di Roma SpA bonds. “It would be interesting to know what names they are exactly buying in the next month or two to see if there is a change in pattern.”
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