BlackRock looks at green bond funds while Pimco urges caution

London

BLACKROCK Inc and some of the world's other major asset managers are setting up funds focused on green bonds. The trick is finding enough of the debt to buy.

BlackRock is developing green bond funds that would compete with Allianz SE and Axa SA, Europe's largest insurers, as well as State Street Corp, which all created similar products last year.

Green bonds are issued by development banks, municipalities, utilities and companies to raise money for measures and projects aimed at benefiting the environment.

"We're seeing strong interest from the different types of clients we service, from large institutional to family-office clients, down to retail investors," said Ashley Schulten, a director at BlackRock.

Issuance is growing as well. Companies, governments and multilateral agencies like the European Bank for Reconstruction & Development (EBRD) have sold more than US$25 billion of green bonds this year - up nearly 80 per cent from the same period a year ago, according to data on credited issuance compiled by Bloomberg.

If sales continue at their current pace, there could be about US$55.8 billion of green bonds this year, according to an estimate from Bloomberg New Energy Finance - up from around US$46 billion issued last year, a figure that includes uncredited issuance.

Still, there just aren't enough bonds given the demand, said Alex Struc, a London-based portfolio manager at Pimco Europe Ltd. "We don't have a fund dedicated to green bonds because we don't think it's a feasible proposition today," he said. "You don't want to create a vehicle that is forced to buy green bonds. It's a recipe for non-common-sense prices by investors and it becomes a demand without supply," Mr Struc said. Pimco invests in green bonds but does not have an investment quota.

Much of the growth in green bond issuance comes from China, which first okayed the sale of the securities last December. Companies and other issuers there have sold more than US$8.45 billion green bonds this year, mostly denominated in yuan, Bloomberg data shows.

The government has approved issuers to sell more than US$15 billion of green bonds to help tackle pollution so far this year, People's Bank of China research bureau chief economist Ma Jun said at a summit in Beijing on Tuesday.

Those sales have largely been to domestic investors. It is unclear how strong demand outside of China will be for the bonds, which may differ from those of other nations, law firm Reed Smith LLP said in a May report. Most notably, clean-coal power stations qualify for green-bond status, whereas foreign environmental investors generally shun anything tied to fossil fuels. BLOOMBERG