Passive funds and concentration risk pose threats to the development of actively managed green bond funds, according to Fitch Ratings.The credit rating agency highlighted the challenges ahead of what it said could be a pivotal year for the green bond sector in 2018. Next year will see a number of funds launched in 2015 reach a three-year track record, an important milestone for many fund selectors.Although green bond issuance increased “dramatically” last year, the market was still small and there were a limited number of issuers, Fitch said.It estimated there were around 100 issuers of green bonds, compared with 3,000 issuers in broader market indices. “Many of these [green bond] issuers are in a handful of sectors, such as supranationals, utilities and local authorities, while sectors like banking and energy, which represent a large part of the broader bond market, are currently under-represented,” Fitch said.The investable universe could end up being even smaller if funds applied additional exclusion criteria, thereby increasing concentration risks, the rating agency added.It cited the example of a green bond issued by Repsol, a Spanish oil and gas company, in May, which was shunned by some investors due to concerns about the compatibility between the company’s business and environmental goals.Fitch said some funds mitigated concentration risk by buying a certain proportion of non-green bonds from issuers that meet broader green criteria.Fitch also raised the prospect of passive funds “cannibalising” active products, as has happened in broader markets. It highlighted Lyxor’s launch of a green bond exchange-traded fund earlier this year as potentially “hamper[ing] the prospects for managed funds”.“In the green bond sector limited diversification makes it harder for managed funds to differentiate themselves from the index, and the small size of the sector creates the risk of active funds being crowded out,” it said.Chris Wrigley, senior fixed income portfolio manager at Mirova, said that although the green bond market was young and still growing, the asset manager had not encountered any particular diversification restraints.“Green bonds are now diversified by currency, country, sub class, credit rating, maturity, sector, etc.,” he said. “We believe there are more than 165 issues in the Bloomberg Barclays Green Index and so there is a significant universe for portfolio managers to select from.”Active managers can engage with issuers while passive managers will tend to wait for an index provider to remove a bond issue from an index if there are concerns from an ESG perspective, he noted. Fitch counted 17 dedicated green bond funds to date in Europe and estimated sector-wide assets under management of around €1.4bn as at the end of June, up more than 400% since 2015.Continued growth in assets could also prove crucial to the sector’s success, Fitch added, as many institutional investors set minimum levels before they can invest in a fund and also typically cap their maximum percentage holding of any given fund. Five of the 17 green bond funds had assets in excess of €100m as at the end of June, with €100m being a common minimum hurdle for larger fund investors.Although strong investor appetite for green bonds – combined with technical factors – could support the growth of the green bond fund sector, its prospects were “far from certain”, the credit rating agency said.For example, green bond funds could simply be subsumed into ESG-integration bond funds, while limited issuance could also curtail sector growth.However, Fitch also emphasised that “all fund sectors have to start somewhere and there are plenty of examples of specialist fund sectors developing over time”.“In this case, broad institutional investor support is an important factor both within green bond funds and in direct green bond mandate-based investment,” said Fitch.
AD Quality Auto 360p 720p 1080p Top articles1/5READ MORECasino Insider: Here’s a look at San Manuel’s new high limit rooms, Asian restaurant UWLA President Robert W. Brown could not be reached for comment Friday. Contacted earlier this week, Brown declined to comment on the WASC decision before it was made public. Without WASC accreditation, the school can still remain open, but students will not be eligible for federal financial aid, Wolff said. Brown has said students could apply for private loans if the school lost its appeal. Wolff said the law school could again appeal WASC’s decision, but UWLA has indicated to WASC that it will not. The accreditation termination also includes UWLA’s paralegal program. William Goldstein, 45, of Los Angeles, who is scheduled to graduate from the law school in May, said the WASC decision was not a surprise. “Right now, we’re all keeping our fingers crossed, hoping to graduate or go on in some manner or form,” Goldstein said, adding that the school had not yet informed the students about WASC’s latest decision. The University of West Los Angeles School of Law has lost one key accreditation, which will affect students’ ability to get federal financial aid. The Western Association of Schools and Colleges voted in November to terminate its accreditation of the school, which has campuses in Inglewood and Woodland Hills, but UWLA appealed the decision. WASC reviewed the law school’s appeal, but decided two weeks ago to terminate the school’s accreditation. WASC’s actions were made public Friday. The termination is effective June 30 to allow current students to complete the spring term. “We will be working with UWLA to arrange for a review of each student’s case and to work out the best possible arrangement for the students,” said WASC executive director Ralph Wolff. Although the school’s paralegal program is accredited by the American Bar Association, its law school is not, in part because it allows law students to attend on a part-time basis. Graduates of non-ABA-accredited schools that are California-accredited can only sit for the California bar, with a few exceptions. The State Bar of California’s Committee of Bar Examiners, however, voted in January to proceed with the withdrawal of its accreditation of UWLA and will take up the matter again when it meets in two weeks. UWLA remains accredited while it appeals. State accreditation is critical because students who attend a nonstate-accredited law school are ineligible to sit for the bar exam without first passing the First-Year Law Students’ Examination, or “Baby Bar,” according to the State Bar. The California bar exam is considered one of the toughest in the country, with an average first-time pass rate of 63.7 percent, according to the State Bar. First-time pass rates vary according to individual schools. The University of California, Los Angeles, which is ABA-accredited, had an 89 percent first-time pass rate in 2005, with 265 students taking the exam. Glendale University College of Law, which is only state-accredited, had a 27 percent first-time pass rate, with 15 students taking the bar, and UWLA had a 21 percent pass rate, with 28 students taking the bar. Lisa M. Sodders, (818) 713-3663 [email protected] 160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set!