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Green bond manager reports good returns, most money used for climate change

A green and social bond asset management company has found that 87% of the 66 impact bonds it invested in during 2017 were used to pay for climate change mitigation activities associated with curbing greenhouse gas emissions.

The LO Funds-Global Climate Bond fund, launched in March 2017 under a partnership with green and social bond asset manager Affirmative Investment Management Partners Ltd., or AIM, and Lombard Odier Asset Management (Europe) Ltd., fully or partially supported 66 green, sustainable or social use-of-proceeds bonds and pure play bonds in 92 countries.

The financial returns on the bonds outperformed the reference benchmark by 111 basis points in 2017 and generated 7.8% in returns in gross U.S. dollar terms, the report said. It added that the performance of the first nine months of the fund shows "significant positive impact can ... be generated in parallel to good investment performance."

Bonds are a form of debt securities used to finance or refinance projects in which an issuer, such as a corporation, municipality or sovereign government, borrows money from investors for a defined amount of time at a variable or fixed interest rate. A number of related debt products have emerged in recent years that are aimed at financing or refinancing assets and initiatives that meet specific environmental or social impact objectives such as reducing greenhouse gas emissions. AIM and Lombard Odier in the report referred to these products collectively as impact bonds.

Green-labeled bonds, which take up the lion's share of the impact bond market, are a type of use-of-proceeds bond in that the proceeds are earmarked to go to green assets. For pure-play bonds, the issuers are entities that generate at least 95% of their revenues from green and social assets.

The Oct. 10 impact report said the fund supported the avoidance of 78,431 carbon dioxide equivalent emissions annually. The fund also backed 75 MW of renewable energy capacity, energy efficiency improvements in 5,760 square meters of buildings, nearly 7,000 cubic meters daily of wastewater treatment, low-carbon transportation in 26 countries with the capacity to support up to 2 million passengers annually, and 5,687 loans to micro-, small- and midsize businesses in emerging markets, most of which are owned by women.

Entities that subscribe to green and social bonds are under increasing pressure to disclose whether, and how much of, their investments are being used to address the issues targeted by the bonds to avoid being accused of greenwashing. AIM in an early October analysis outlined the inherent challenges of calculating the environmental benefits of certain types of bond investments, particularly those involving energy efficiency projects.