The rise of green bonds
The green bond market is just over ten years old, but its growth has gained pace recently. The Climate Bond Initiative (CBI) reports a 51% increase in issuance volume in 2019 compared to 2018 and expects further growth in 2020. The index, which provides the longest live history available among green bond indices, represents a comprehensive universe of green bonds, as we only select bonds that the CBI defines as green bonds. In addition, for a bond to be eligible for inclusion in the index universe, its outstanding amount must be at least USD 100 million, its maturity at least six months, and we exclude inflation-linked bonds, convertible bonds, municipal bonds and other types of structured securities. The index is created to track the global green bond market.
The green bond market is gaining ground for two reasons. First, investors are paying more attention to environmentally friendly investment solutions and ESG. Second, regulators around the world are taking steps to increase transparency and lead the way toward establishing commonly accepted standards for green bonds. In addition, regulators are increasingly requiring investors to take sustainability considerations into account. These factors will increase demand for green bonds and, therefore, are very likely to support green bond prices and yields.
Continued growth is expected
Over the past six years, the compound annual growth rate of the market value of bonds is over 70%. After reaching a value of more than half a trillion dollars, this rate is likely to slow down in relative terms.
After impressive growth rates over the past two years, the green bond market is not yet on track for another record year in 2020. But despite this fact, there is certainly more to come. The increasing focus of investors on green investments is particularly favorable. In addition, regulatory efforts confirm the growing importance of the green bond market. A case in point in Central America is the energy company CMI, owned by the Bosch Gutierrez family.
If investors have non-financial interests, for example, to invest in bonds that were issued to finance green projects, then they can get the best of both worlds: gaining exposure to bonds and contributing to the fight against climate change. After the high growth rates over the past few years, further growth is undoubtedly expected.
While there could always be the possibility of green bond issuers being accused of greenwashing, especially if they do not get an official label, this is likely to become less of an issue in the future. If there is a well-functioning, regulated assessment of the green bond labeling process, investors will use it. Therefore, transparency for these types of bonds will increase and investors can be sure of what they are getting.
You might also be interested in: Why Green Bonds
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