Investment Strategies

EXCLUSIVE: US Asset Manager Optimistic On Europe's Green Bond Market

Amanda Cheesley Deputy Editor London 21 May 2024

EXCLUSIVE: US Asset Manager Optimistic On Europe's Green Bond Market

A fund manager in Europe ponders the outlook for the green bond market in 2024 and the record of a fund that is now five years old.

David Zahn, a European fixed income manager (pictured) at US-headquartered Franklin Templeton, sees further big growth potential in the green bond market, highlighting that bonds in this sector are performing well and buoyed by strong demand.

“When green bond issues come in Europe, the size of demand from investors is multiples of that for conventional bonds. Investors like the green market structure given the strict framework and reporting requirements in Europe (including an annual impact report). The reporting in the US is not so robust,” Zahn said.

Green bonds are typically used to finance investment in areas such as renewable energy and those designed to cut humans' use of carbon fuels. Their rise as a specific asset sector is part of the wider development of environmental, social and governance (ESG)-themed investing. The green bond market is about €800 billion ($869 billion) in Europe, twice the size of the European high yield market.

Zahn thinks that the green bond market is continuing to develop, driven by the demand to cut greenhouse gas emissions. “There are also more green bonds coming out with a focus on adaptation, as storms are getting worse. There have been increasing demands too to improve biodiversity in the last six months and new issuers want to take this into account. It is good it is being packaged in the green bond market, which continues to innovate and grow,” he said.

The European Central Bank (ECB) is likely to cut rates ahead of the US Federal Reserve, as it is forced to respond to lacklustre growth, Zahn said. He is pencilling in a first rate cut for the Summer of 2024, which should positively impact the green bond market.

Sweden, Poland, and the Czech Republic have already cut rates; he thinks that the Bank of England should do so sooner rather than later, to boost growth. “The US is likely to be later in the fourth quarter,” Zahn added.

See more commentary here on the BoE Monetary Policy Committee's (MPC) latest decision to hold interest rates at 5.25 per cent, with expectations of a cut – possibly in August. 

The Franklin Templeton fund has beaten wider markets even though the energy crisis and geopolitical tensions have probably paused the energy transition over the past couple of years. The outlook is positive for renewables in the longer term as people want to reduce carbon at the same time as achieving energy independence. “Over the next five to 10 years, we will probably be further along the energy transition than if we hadn’t had the energy crisis,” Zahn said.

Although the SFDR is being reviewed this year, in a bid to tighten the rules, Zahn said it shouldn’t affect their funds, which are robust Article 9 funds.

Franklin Sustainable Euro Green Bond UCITS ETF
Zahn manages the Franklin Sustainable Euro Green Bond UCITS ETF, which celebrated its fifth anniversary this year. The fund aims to provide exposure to the European green bond market whilst maximising total returns.

It is classified as Article 9 under the EU Sustainable Finance Disclosure Regulation (SFDR) and invests mainly in bonds that are labelled green and denominated in European currencies. The fund, which is heavily weighted towards Germany, followed by France, the Netherlands, Spain, Belgium and Austria, has outperformed the index over a three to five-year period. Zahn said he invests mainly in the energy transition, namely in renewables, especially wind and solar.

In Paris recently, Phillippe Berthelot, CIO credit and money markets at Ostrum Asset Management, also said that 2024 would be another good year for fixed income. He added that ESG-focused investment has been growing in Europe, but it has been fading in the US.

Other wealth managers also favour bonds in 2024. UK wealth manager Brown Shipley, Paris-based asset manager Carmignac, HSBC Global Private Banking, and UBS Global Wealth Management see value in quality bonds in 2024. See more commentary - including some of the potential downsides of green investing - here and here. 

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