Franklin Tempelton delves into the 'green' bond market with new fund

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Franklin Templeton has launched a municipal green bond fund to provide investors with an avenue to dedicate capital to programs with a defined environmental purpose.

“The fund is one of the few strategies solely focusing on municipal green bonds, and seeks to maximize income exempt from federal income taxes by investing in green bonds, including climate and sustainability bonds, as well as environmental impact bonds,” the firm said in a release.

The fund will invest at least 80% of its net assets in green municipal bonds.

The fund will invest at least 80% of its net assets in municipal green bonds from issuers including states, cities, municipal water and sewer enterprises, transportation systems, universities, and hospitals, among others.

“We see this as an opportunity to communicate to investors what green is and where Franklin sees it headed,” Nicholas Bucklin told The Bond Buyer. “There is real opportunity for all investors to look at the municipal market through a different lens and for issuers to embrace disclosing where they see climate and impact in their offering documents and continuing disclosures so they can be competitive.”

“The muni green bond universe is expanding, and for investors, green bonds provide an opportunity to dedicate capital to projects and programs that have a defined environmental purpose,” said Ben Barber, director of municipal bonds for Franklin Templeton Fixed Income, “As demand builds from impact-focused investors and financial professionals, the limited inventory of offerings gives our team first mover advantage. As one of the largest municipal bond fund managers in the nation, our resources allow us to more completely analyze the space and better identify truly green projects.”

Franklin does also manage European Green Bond strategies, but these are not available to US investors.

Meanwhile, a lack of robust, consistent disclosure of climate change risk in the municipal bond space has clouded investor confidence in the market.

From lawyers to data providers to investors and analysts, the consensus is climate change disclosures are increasingly important for an industry also dealing with COVID-19 implications.

Municipal “green bond” designations by various market participants are also complicating how investors domestically and internationally view and understand the market for those bonds.

The lack of a universal language to define “green” is increasingly confusing investors and issuers alike while large asset managers have their own “black boxes” to define what they consider green or ESG.

Franklin Templeton said it is likely one of the first firms to open the black box to the public and that it is seeking investors in municipals around the globe. The firm hopes to change the understanding of what "green" means.

“We absolutely are considering international investors in our strategy. Of course, tax-exempt issuance is less relevant for international investors because of the tax-exempt nature. Even though the taxable municipal inventory has grown, it’s still a smaller portion of the market on a broader scale.”

“The municipal green bond market is young and continues to evolve, and the growing market allows dedicated green bond investment portfolios to achieve diversification across sectors and issuers," Bucklin said. "For investors seeking to align long-term investment goals with their environmental values, we believe Franklin Municipal Green Bond Fund offers a compelling solution.”

The Franklin Municipal Green Bond Fund is managed by San Mateo, California-based portfolio managers Daniel Workman and Bucklin of Franklin Templeton’s municipal bond team, in what they say is one of the longest-tenured municipal bond investment teams in the industry.

“We believe active management is critical for municipal green bond investors,” Workman said. “In addition to applying credit research and identifying relative value opportunities, we perform due diligence to select authentic green bonds instead of solely relying on third party screens or labels that may not properly scrutinize the use of proceeds of a given green bond. We also look for opportunities to invest in unlabeled green bonds that use proceeds for clear environmental objectives.”

There are third-party verifiers of green and impact bonds, including firms such as Kestrel Verifiers and Sustainalytics, which provides green designations as well. NASDAQ last year launched its own Sustainable Bond Network. Sources said there is value in using those second- or third-party designations, especially for smaller asset managers.

Build America Mutual also has a green designation for insuring bonds.

Bloomberg also is ascribing "green" designations on certain deals and earlier this year described for The Bond Buyer its process for designating transactions as green.

“Currently our data team reviews documentation provided by the issuer to look for certain criteria we have designated as green in our policy. This includes clean water, renewable energy (wind, solar, geothermal), green building construction and other related projects,” Mark Betteridge, global head of Fixed Income and Currency Analytics at Bloomberg said in early June.

Bloomberg said it is working on updating its system to more clearly capture the involvement of third-party verifiers involved in deals.

“We currently add the third-party verifier in the text notes of the DES (Bond Description) and are in the process of enhancing our system to capture the Verifier as an Involved Party similar to how we show underwriter, bond council, trustee, etc., Betteridge said.”

Asked about when Bloomberg makes the determination to designate something as green, Betteridge indicated that it depends on when Bloomberg receives key information.

“This green designation is done at time of issuance or whenever we are provided enough documentation to make a determination that the issued bond meets our green criteria,” Betteridge said. “We leave it to our clients to determine which certification they follow, and what their own policies are for green bond issue designation.”

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