Why green bonds are now an investable asset class

Thought of the day

by Chief Investment Office 27 Feb 2018

It’s been a big week for green bonds. On Friday, Indonesia issued USD 1.25bn of the world's first Islamic green sovereign bond, and on Monday Belgium issued its debut green bond, selling EUR 4.5bn of 15-year bonds, after attracting bids for EUR 13bn.

As the market develops, some concerns remain about the validity of green bonds’ environmental credentials in what is a self-labelling market. But we believe the green bond market is increasingly attractive for investors with sustainable investing objectives.

  • Improving liquidity. Global green bond issuance is set to grow by around 60% this year to as much as USD 250bn, according to the Climate Bonds Initiative (CBI). Market depth is improving too. Existing corporate and agency issuers are issuing bonds over a wide range of tenors, working toward providing liquid reference curves for green bonds.
  • Comparable returns. The Bloomberg Barclays MSCI Green Bond Index has slightly outperformed the Bloomberg Barclays Global Aggregate since December 2013, 17% versus 15%.
  • Better liquidity suggests investors can now gain easier exposure to environmental value while also not sacrificing returns. In addition, as the market grows, we expect that third-party monitoring of green credentials, both at issuance and on an ongoing basis, will develop and help address “greenwashing” concerns.

In our view green bonds have progressed from a niche market into an investable asset class. We expect diversified exposure to them to generate comparable returns to a customized mix of high grade and investment grade corporate bonds, and to contribute to positive environmental outcomes.

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