Greenium An ally, and source of opportunities

Greenium An ally, and source of opportunities

Nelson RibeirinhoSENIOR FIXED INCOME ANALYST - PORTFOLIO MANAGER

Agathe FoussardFIXED INCOME PORTFOLIO MANAGER

This promotional document is intended solely for professional clients as defined by MiFID.The information provided reflects MIROVA’s opinion as of the date of this document and is subject to change without notice.

3 – Monetising the greenium

Guarantee of performance? 11From tool to management decision 12

1 – Unstoppable green bondsAnother record year… 2Highlights in 2020 32021: another record in sight 4

2 - The greenium under the microscopeSudden conversion to SRI 5Nuancing the greenium 6Our approach in detail 7

More than ever, green bonds arethe focus of attention and thecuriosity they are arousing isequalled by the questions theyhave raised. These instruments,which are geared towards "green"projects, have emerged as amarket segment of their own at atime when questions about theintegrity and sustainability ofinvestments are becomingincreasingly pressing.

At the heart of discussions aremarket size and composition,liquidity and above all thegreenium (a contraction of greenand premium). The greenium - i.e.the yield that investors concedeto companies issuing a greenbond compared to theperformance they would haverequired from these samecompanies for a conventionalbond with the same maturity -was long perceived as volatile,hovering in one direction oranother, before finally settlingdown visibly in 2020.

One cannot really talk aboutgreenium without looking at the

green bond market and thegrowing appetite of investors forit, and consequently, withouttaking into account the fact thatdemand far outstrips supply.

The greenium currently appearsto be moderate (as of 20 January2021, 2 bp yield/spread). It istherefore difficult to talk aboutoverheating or a bubble per se.However, analysing it in greatdetail using a proprietary model,available in real-time, will putselection back at the centre of themanagement of theseinstruments. As it isheterogeneous, a greenium canindeed provide a source of addedvalue in the context of arbitragesbetween securities.

Green bonds have historicallybeen a source of performanceand the study, based on themetrics we have analysed,provides what we believe is aclear overview:

The existing tension betweenscarce supply and ever-increasing demand results ina concession in the form of a

greenium, which does not,however, result in a depletionof the liquidity and availabilityof green bonds. The liquidityof green bonds is evengreater in some respects.

There is nothinghomogeneous aboutgreenium; it is more aquestion of

► seniority (anyone looking fora low greenium would betterhave have to target the mostsubordinated securities andgive preference to hybrids),

► credit rating : the lower thecredit rating, the lower thegreenium,

► sectors (supply and demandpartly dictate how sectorswork: real estate, industry orchemicals are attractive) and

► maturity (long maturitymeans a higher greenium,owing to insurers...).

Accordingly, greenium are aboveall dynamic and therefore requireconstant monitoring if we are toreap their benefits in themanagement of our portfolios.

Outstanding sustainable issues (in $m) by format - At end of 2020 | Chart 2

The information provided reflects MIROVA’s opinion as of the date of this document and is subject to change without notice.*For more information on our methodologies, please refer to our Mirova website: www.mirova.com/en/research.

Green bonds are now worthmore than $900bn (source:Environmental Finance,31/12/20), and their enormousgrowth potential is not beingundermined.This green bond market, whichis still in its infancy, stands outfor its dynamism and eventhough it only representsaround 2% of the bond marketstock, it was responsible foralmost 17% of flows in 2020,excluding sovereign issuers.(Source: Natixis CIB)

Unstoppable green bondsAnother record year ...

Green and sustainable emissions by year and sector (in $m) | Chart 1

0

100 000

200 000

300 000

400 000

2012 2013 2014 2015 2016 2017 2018 2019 2020

Agency Corporate Financial Institution

Municipal Sovereign Supranational

2020 saw a record number ofissues after a sluggish first half,disrupted by the pandemic. Acatch-up effect of green bondissues was then observed in thesecond half of 2020, which is alsohistorically more dynamic thanthe first. Issues thereforeexceeded those of 2019, albeit bya small amount.

The "social" and "sustainable"formats ("green" and "social“ atthe same time), previouslyovershadowed by green bonds,have become the alternatives ofchoice for combating the effectsof Covid-19, notably by financing

the means to fight poverty or topromote access to financing or toessential services, to supportSMEs and the real economy. 2020was the year of the explosion ofthese formats, with a notable shiftin issue requirements from greenbonds to social bonds. 2021should confirm the trend.

Sustainable Linked Bonds (SLBs)and Sustainable DevelopmentGoals-linked bonds (SDGs) pitenvironmental impact againstfinancial return by offering, inmost cases, an additional returnif environmental targets are notmet.

We therefore remain verycautious about these newformats, while systematicallyanalysing them in order to judgewhether the objectives aresufficiently ambitious andachievable.

Thus, clear, ambitious andachievable objectives will improvethe rating and the opinion of theinternal ESG analysis team on theissuer's overall energy transitionstrategy.

.

* Source: Environmental Finance; Mirova as of 31/12/2020

900 277

176 273

199 445

11 211

Green bond

Social bond

Sustainability bond

Sustainability-Linked bond

Sources: Environmental Finance; Mirova as of 31/12/2020

Sources: Environmental Finance; Mirova as of 31/12/2020

http://www.mirova.com/en/research

Highlights in 2020

Increased diversification has occurred through the private corporate sector. However, any green bondmanager has to deal with the historical biases of this segment, i.e. a lot of utilities, banking and real estatesecurities and public issuers (agencies, supranational, regions).

While the market started with these more 'obvious' issuers, 2020 saw the emergence of green bonds fromcyclical companies that issued more than usual.

We will focus here on the main highlights of 2020 on benchmark-size (above €500m or $500m equivalent)and public green bond market, without claiming to have covered this vibrant market comprehensively.

Car manufacturers gearing up*

Daimler, Volkswagen and Volvohave joined in, following theToyota and Hyundai captives.Their relative scarcity, like that ofthe sector within green bonds, is asource of greenium.

Forests turned into greenpaper*

Tornator, UPM, Stora Enso aresupplementing the green bondoffer in the cyclical sector.

Luxury and textile industrydressed to the nines*

Chanel, Burberry issued(classified as ineligible becausethe environmental impact of theirprojects was insufficientaccording to Mirova (OpEx). Intextiles, VF Corp and Adidas alsomade a grand entrance.

European Sovereigns: gettingstarted

Germany, Hungary and Swedenhave launched their first greenbonds after Belgium, France andIreland. After Italy, the UK isexpected to follow suit.

Emerging green bonds...already developed

Mexico and Chile, with multiplestrains (emerging OECDcountries) have supplementedIndonesia's offering. Brazilianbanks also entered the market inearly 2021.

Subordination: priority togreen bonds?*

The bulk of HY issues remainsconcentrated on subordinatedinstruments and very little onsenior debt (which is mostlydenominated in $, in emerging

countries or in the Americas) onthe one hand with hybrid bonds ofnon-financial companies such asEnBW, EDP, Orsted, etc. and onthe other hand with financialsubordinates (banks, insurances)i.e. AT1/CoCo with BBVA,Kookmin, Shinhan and QNB orTier 2 with Generali, Kookmin, DeVolksBank, AIB, inter alia.

High yield: could do better!*

Getlink, the operator of theEurotunnel under the EnglishChannel, and VZ Vendor, atelecoms and media group, havebeen added to the list of HYissuers, which are still few and farbetween, stuck at less than 5% ofgreen bonds, as in theconventional market.

The information provided reflects MIROVA’s opinion as of the date of this document and is subject to change without notice.

* The securities mentioned above are shown for illustrative purpose only, and should not be considered as a recommendation or a solicitation to buy or sell.

Google searches forgreen, Visa plays its card*

Both of these technologyissuers have raised substantialamounts of bonds over thesummer. They supplement theexisting offer alongside Apple.However, they are notconsidered as eligible byMirova because allocation offunds was deemed too vagueby the SRI research team.

Mass-marketconsumption, conspicuousby its absence?

This is normally the non-financial business sector that

accounts for the largest shareof traditional indices. It includesthe pharmaceutical industry(generally social vocation),mass consumption andhousehold equipment.

The non durable goodsconsumer sector, as the nameimplies, has fewer greenprojects. The financing requiredis less suitable for the greenbond format as it is stillallocated to mostly operationalexpenditure.

Banks: more and more*

The banking sector continuedto develop. New issuersentered the green bond

segment. As mentioned earlier,BBVA (Banco Bilbao VizcayaArgentaria) issued a contingentconvertible bond (CoCo) ingreen bond format.

2021: another record in sight?

The information provided reflects MIROVA’s opinion as of the date of this document and is subject to change without notice..

The expected return to normal health conditions in 2021 should be a breath of fresh air forcompanies. They will be more inclined to issue green bonds in this context. In addition, stimuluspackages aimed at financing the energy transition will probably be financed by "sustainable" bonds.

2021 will therefore be another year rich in green and sutainable bonds, which is why it seemsappropriate to envisage $550bn in issues, i.e. an increase of 52%. Sovereign wealth funds andsimilar bodies will be more active, such as KfW or the EU, which is planning €250bn, or the UK,Spain, Austria, Slovenia and Denmark, which should issue their first green bonds. Expansion to thecyclical and consumer sectors also seems to be on track.


The greenium under the microscopeSudden conversion to SRI

The greenium, or the percentage of performance that investors concede to issuers, has long beenseen as volatile, moving seasonally in one direction or another, and finally settling down visibly in2020.

The greenium is the result ofa search for integrity that hasbecome systemic; in otherwords, a number of funds aresuddenly converting to SRI,thus initiating an increasedsearch for green bonds.However, the transformationof funds into SRI funds istaking place much morequickly than theimplementation of corporatesustainable development

strategies and therefore thedevelopment of the greenbond market, hence thesupply-demand tensionalready mentioned.

Schematically, 26% of Euro-Corporate funds and 16.7%of Euro-aggregate funds arenow investing in greenbonds, which account forless than 3.5% and 2% of thebenchmark indices. This

dichotomy alone is enough tojustify the greenium. (sourceBarclays /EPFR)

The subsequent scissoreffect (as much supply as in2019, around $300bn, formore demand than in 2020)naturally resulted in agreenium.


Mitigating the greenium

This study by market segment,based on several breakdownsusing a proprietary green bondvaluation model that we havedeveloped, analyses thegreenium according to severalcriteria.

This provides numerous keysfor interpretation, with differentdegrees of detail to fine-tunethe deciphering of thegreenium. Based on theseelements, the model appears tobe able to deliver arbitrageopportunities to turn marketinefficiencies into a strength.

Our model performs ananalysis by issuer, sector,credit rating, Mirova'sinternal SRI ratings (i.e.integrity) and even liquidity.In order to meet a minimummarket depth and dataavailability, the modelestimates bondsdenominated in euros.

On 20 January 2021, accordingto our internal model, thegreenium is not high, ayield/spread of 2bp or 0.15% ofsurplus (par) value for an 8-yearduration bond. Investors are

therefore behaving with

moderation. For thesereasons, we cannot talkabout green bond "bubbles",not to mention the fact thatthe greenium is neitherpermanent norhomogeneous.

A greenium is not a foregoneconclusion either. Today it isbeing fuelled by excessivedemand, but it will eventuallydissipate as the marketgrows in size.

A proprietary model

Mapping & Greenium Valuation Model | Chart 3


Sources : Bloomberg , Mirova

Yieldirregularitieswithin the greenbond andconventionalcurves aresmoothed outover the entirebond portfolio soas not toexacerbate pricedistortions.

Capturing the complexity of bond features | Chart 4

Our approach in detail

The sector is a determining factor.

Sectors are analysed here according to this methodology: subordinated instruments, of which there are20*, are excluded; only senior debt is studied. It appears that:

Real estate companies, chemical companies, certain industrial companies and transport companiesshow a slightly negative greenium, in favour of the investor. Natural gas extractors (mostly Engie greenbonds) and covered bonds are flirting with a zero greenium because they are both "mature" green bondswhose valuations have had time to converge towards those of their traditional counterparts.

Focussing on specific green projects, and thus ensuring a certain environmental impact, logicallygenerates a greenium as more investors are likely to buy them. This is the case for sectors such as theautomotive, telecommunications and consumer sectors (where, most importantly, the scarcity effectcomes into play) and therefore present a significant greenium (>7 bp),

Among the most represented sectors, banks (multiple controversies limiting interest in buyingconventional debt) or utilities such as "Electric“** and "Natural gas“** (renewable energies vis-à-visconventional power plants) show a moderate greenium (~2 bp).

It should be noted that the calculation is becoming increasingly difficult for utilities as these companies arereplacing their conventional bonds with green bonds and comparison to their conventional curve isbecoming more difficult.

Greenium by sector | Chart 5



* The reported data reflect the situation as of the date of this document and are subject to change without notice.** The securities mentioned above are shown for illustrative purpose only, and should not be considered as a recommendation or a solicitation to buy or sell.



The greenium isincreasing with maturity.

Combined with a frequentsearch for duration and simplyfor yield by other investors, thegreenium can only but increasewith the maturity of bonds.

Insurers, some of whom,notably the French, arerequired to "decarbonise" theirinvestment footprint, arelooking for long-dated bondsfor reasons relating toregulation, solvency, assetliability management and ofcourse yield levels. Theconsequent demand frominsurers is being felt at thelong end of the curve from 9-10years.

Greenium by maturity band (Jan-01) | Chart 6

Inaugural issuers, frugalissuers?*

Generally speaking, inauguralissuers, which are also world-renowned and have significantoutstanding bonds, command ahigher greenium. This was thecase for Daimler orVolkswagen. Conversely,companies with that are lesswell known are more generousto investors. They use greenbonds to enhance theirreputations, to capture a largerinvestor base, and thereforegreater demand, while raising

green bonds. Conversely,inaugural green bonds alsomean a negative greenium, asin the case of the real estatecompany Cofinimmo or theforestry company Tornator.

Ratings/Seniority/Yield:Upgrading?

The greenium is clearly evidentwhen ratings are between A-and BBB- (S&P), i.e. IG bondssubject to the hunt for yield,which is moreover positive, in alow interest rate context. TheA- ratings and above show aslightly negative greenium; the

same applies to HY ratings,although on a reduced sample.Here, the scarcity of supplydoes not outweigh thecompany's fundamentals.Issued more recently, high-yieldgreen bonds have undergonetougher market phases,justifying issue premiums, andtherefore a negative greenium,and so an opportunity gain forinvestors. Less market depthand reduced liquidity also makethe equation lessstraightforward.

Sources: Bloomberg ; Mirova as of 20/01/2021

1.4

2.7

1.1

0.5

2.7

0.9

4.14.4

3.3

7.2

1.8

0-2 2-4 4-6 6-8 8-10 10-12 12-14 14-16 16-18 18-20

Residual maturity (in years)

Average

greenium



Greenium by S&P rating (Standard & Poors) | Chart 7

Negative greenium(favourable)

Positive greenium (unfavourable)

It seems that investors are findingit more difficult to derive andconcede a premium for senior andsubordinated bonds.

Here we look at the greeniumagainst the total spread of theissue to measure it as apercentage (%) and thus put thispremium into perspective withrespect to the level of the spread(e.g. 1 bp of greenium on a 50 bpspread (2%) which we compare to4 bp of greenium on a 200 bpspread), in the belief that we arewilling to concede a largergreenium when the spread iswider.

Senior green bonds are widelyaccepted and, according to ourinternal model, present a premium(4 to 4.6% of the spread). Thegreenium of subordinated bonds

such as juniors or Tier 2srepresents "only" 2.6% of thespread, which is easy to offset, ifonly with a higher rate of return.This is not the case forsubordinated bonds which

remain more sophisticated(prepayment options,perpetuity, step-up coupon,regulatory value, capitaltreatment, intrinsic value anddistinct terms),

leave room for inefficienciesthat can be exploited and

thus present economic valuesthat are more difficult foreveryone to estimate

Similarly, we observe that thegreenium tends to decrease asthe spread increases, suggestingthat the additional risk taken,

reflected in a higher spread,logically tends to make thegreenium disappear.

The tool developed internallyenables us to monitor thevaluation of green bonds and thusto invest the savings entrusted tous by our investors in the bestpossible way. Accordingly, despitethe existence of a slightly positivegreenium, our bond managementalways aims to reconcile meaning(environmental impact) andperformance.




Greenium by z-spread band| Chart 8

Greenium as % of z-spread by seniority | Chart 9

75% 80% 85% 90% 95% 100%

Sub

Senior bail-in

Senior

Covered bonds

2.6%

4.0%

4.6%

13.6%

Conventional spread Greenium

-15

-10

-5

0

5

10

15

Gre

en

ium

Z-Spread to Worst (in bp)

Greenium trend


Monetising the greenium

Guarantee of performance?

A source of arbitrage opportunities, and therefore of potential performance for asset managers, thegreenium offers new possibilities for approaching an increasingly vast market without losing sight of themedium/long-term investment horizon (3 years). The investment process remains unchanged, still focusedon environmental impact and the search for alpha.

The sharp increase in the greenium makes it possible to carry out curve arbitrages between green andconventional bonds and vice versa.

It is not our intention to carry out these arbitrages frequently. They are conditional on maintaining a certaindegree of SRI impact in our portfolios.

More defensive in composition, the green bond market naturally performed better during 2020 and theprevious years, which were subject to risk aversion and volatility (market variations were rarely so rocky).

Historical performance of the Green bond index compared to the conventional index | Chart 10


The greenium does not detract from the past performance of green bonds. The greenium, notwithstandingits omnipresence, does not empirically hinder the overall performance of funds, as illustrated in the graphabove.

Sources : Bloomberg ; Mirova 31/12/2020Past performances do not anticipate the future performances.

28.40%

24.13%

-1%

0%

1%

2%

3%

4%

5%

0%

5%

10%

15%

20%

25%

30%

35%

De

c-1

5

Mar

-16

Jun

-16

Sep

-16

De

c-1

6

Mar

-17

Jun

-17

Sep

-17

De

c-1

7

Mar

-18

Jun

-18

Sep

-18

De

c-1

8

Mar

-19

Jun

-19

Sep

-19

De

c-1

9

Mar

-20

Jun

-20

Sep

-20

De

c-2

0

Outperformance (rhs)

Barclays Global Green Bond Index TotalReturn Hedged USD

Barclays Global Aggregate GDP weightedtotal return index hedged USD

Level of LBBW* spreads | Chart 11

From tool to investment decision-making

In the summer of 2020, wenoted a high greenium on thesenior non-preferred LBBW26* bond in the portfolio,above a 15 bp yield spread, orabout 0.75% price difference allother things being equal. Thisprice differential is due to the

coronavirus crisis, but this wasnot always the case; in thepast, these two bonds tradedat the same price. We thereforedecided to sell the LBBW 26green bond and buy theconventional LBBW 27. Theissuer itself has a "Positive"

rating (4 on a scale of 5) by ourESG research team**. A highdegree of impact is thereforepreserved in case of arbitrage.


* The securities mentioned above are shown for illustrative purpose only, and should not be considered as a recommendation or a solicitation to buy or sell.** The information provided reflects MIROVA’s opinion / the situation as of the date of this document and is subject to change without notice. For more information on our methodologies, please refer to our Mirova website: www.mirova.com/en/research.

Relative performance LBBW | Chart 12

-10

-5

0

5

10

15

20

25

30

-0.5

0

0.5

1

1.5

2

2.5

3

YIE

LD

IN

%

Greenium (rhs) LBBW 0.375 07/26 LBBW 0.375 02/27

Engie*, a utilities provider, hasissued a plethora of seniorbonds given the high level ofits capital requirements. Theissuer has a balanced, liquid

and lively green bond curve,providing investmentopportunities across allmaturities from one to 15 yearsof securities. However, a price

inefficiency appeared, whichwe turned to our advantage.We therefore carried out anarbitrage between these twogreen bonds.

28 26

4144

24

4542

0

10

20

30

40

50

60

1 2 3 4 5 6 7

Mid

z-s

pre

ad

(in

bp

)

Years to Workout

Green Conventionnel

Log. (Green) Log. (Conventionnel)

Sources: Bloomberg ; Mirova Sources: Bloomberg ; Mirova

Past performances do not anticipate the future performances.

http://www.mirova.com/en/research

Relative performance Icade | Chart 14

Société Générale* issued agreen bond at a premium toconventional debt, which wealso took advantage of inOctober. Since then, the bondwe purchased hasoutperformed otherwise

similar Société Généralebonds.

The presence of a greeniumcan also motivate a decisionon whether to acquire a newbond on the primary markets.

For example, we refrained fromparticipating in the latestOrange green bond issue,which was consideredovervalued


* The securities mentioned above are shown for illustrative purpose only, and should not be considered as a recommendation or a solicitation to buy or sell. The information provided reflects MIROVA’s opinion / the situation as of the date of this document and is subject to change without notice.

Engie relative performance | Chart 13

-20

-10

0

10

20

30

40

0

0.5

1

1.5

2

2.5

Jan

-20

Jan

-20

Feb

-20

Mar

-20

Mar

-20

Ap

r-2

0

May

-20

May

-20

Jun

-20

Jul-

20

Jul-

20

Au

g-2

0

Sep

-20

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Dec

-20

Jan

-21

Feb

-21

YIE

LD IN

%

Greenium (rhs) ICADFP 1.625 02/28

ICADFP 1.5 09/27

0

10

20

30

0

0.5

1

1.5

2

YIE

LD

IN

%

Greenium (rhs) ENGIFP 0.375 06/27

ENGIFP 1.75 03/28

Sources: Bloomberg ; Mirova Sources: Bloomberg ; Mirova

Past performances do not anticipate the future performances.

Legal Information

The information contained in this presentation is intended exclusively for professional clients as defined by MiFID. If this is not the case andyou receive this presentation and/or any attached document by mistake, please make sure you destroy them and inform Mirovaimmediately.

This document is a non-contractual document for information purposes only.

This document does not constitute or form part of any offer, or solicitation, or recommendation to subscribe for, or buy, or concede anyshares issued or to be issued by the funds managed by Mirova investment management company. The presented services do not take intoaccount any investment objective, financial situation or specific need of a particular recipient. Mirova shall not be held liable for any financialloss or for any decision taken on the basis of the information contained in this document, and shall not provide any consulting service,notably in the area of investment services.

The information contained in this document is based on present circumstances, intentions and guidelines, and may require subsequentmodifications. Although Mirova has taken all reasonable precautions to verify that the information contained in this document comes fromreliable sources, a significant amount of this information comes from publicly available sources and/or has been provided or prepared bythird parties. Mirova bears no responsibility for the descriptions and summaries contained in this document. No reliance may be placed forany purpose whatsoever on the validity, accuracy, durability or completeness of the information or opinion contained in this document, or anyother information provided in relation to the fund. Recipients should also note that this document contains forward-looking information,issued on the date of this presentation. Mirova makes no commitment to update or revise any forward-looking information, whether due tonew information, future events or any other reason. Mirova reserves the right to modify or remove this information at any time withoutnotice.

The information contained in this document is the property of Mirova. The distribution, possession or delivery of this document in somejurisdictions may be limited or prohibited by law. Persons receiving this document are asked to learn about the existence of such limitationsor prohibitions and to comply with them.

Non-contractual document, issued in March 2021.

MIROVAPortfolio management company - French Public Limitedliability companyRegulated by AMF under n°GP 02-014RCS Paris n°394 648 216Registered Office: 59, Avenue Pierre Mendes France – 75013 –ParisMirova is an affiliate of Natixis Investment Managers.

NATIXIS INVESTMENT MANAGERSFrench Public Limited liability companyRCS Paris n°453 952 681Registered Office: 43, Avenue Pierre Mendes France – 75013 –ParisNatixis Investment Managers is a subsidiary of Natixis.

Documents

Greenium An ally, and source of opportunities