We believe green bonds are a “no-brainer” for clients focused on sustainable investing. Green bonds offer similar yields, ratings and return profiles to other fixed income investments, and fund projects that are having a tangible and measurable impact in the effort to address environmental challenges. In other words, they offer additional impact benefits for investors, without additional financial risk.
That said, there are still diversification challenges for those wishing to invest in green bonds. We believe that our approach to building sustainable bond portfolios, in which we use green bonds alongside other bonds with attractive environmental and social characteristics, is an effective way to achieve our clients’ investment and sustainability goals.
Green Bonds 101
In recent years, the green bond market has experienced explosive growth. We expect this growth to continue due to high investor demand and increasing demand from both governments and capital corporations to finance environmental projects.
There are several reasons why clients may be interested in adding green bonds to their portfolios. The main incremental benefit that green bonds provide is as an “impact investment”: investors in these bonds know that they are directly funding projects that address environmental challenges. Labeled green bonds obtain their certification during the underwriting process by following a set of guidelines such as the Green Bond Principles or the Climate Bond Standard. Issuers of a labeled green bond must identify how the proceeds will be used prior to issuance and commit to reporting on the resulting environmental outcomes. There are also a large number of “climate-aligned” bonds that are issued outside of any labeling process, but which nonetheless target projects that address climate change issues in a variety of sectors.
You may also be interested in: Sustainable Finance.
Add green bonds to portfolios
As noted above, individual green bonds generally perform in line with any other bond with comparable duration, sector and maturity, but as a whole, the green bond market is not completely comparable to the broader market.
For one thing, the green bond market is not as diverse in credit qualities, sectors, maturities and geographies as the overall global bond market. As indicated in the infographic, most green bond issuance comes from a variety of government entities: local governments, multilateral development banks, agencies or state-owned entities.
From a sector standpoint, transportation and energy dominate issuance. The climate bond universe is relatively long dated (70% of bonds have maturities of 10 years or more), concentrated in high quality investment grade issues (43% of the entire universe is AAA rated) and geographically concentrated (70% of issuance comes from China, USA, UK and France). Although Central America has also recently entered the bond market. In Guatemala, the company owned by the Bosch Gutierrez family, CMI Energia, has issued a large number of bonds.