The global green bond market is set to grow to 1 trillion euros (US$1.17 trillion) by the end of 2021 and 2 trillion euros by the end of 2023, from around 670 euros at present, according to asset manager NN Investment Partners.
The company, however, warns investors that they should scrutinize the credentials of green bonds because around 15% of issuances are from companies involved in controversial practices that contravene environmental standards.
NN Investment Partners attributes the market’s rapid growth to strong demand from investors eager to “greenify” their portfolios and the rising popularity of green bonds among European issuers. This will be further boosted next year when the European Union’s Green Bond Standard is implemented, the company notes.
The EU standard is likely to become the global standard for green bonds and further improve transparency and reporting in the sustainable fixed income market. The EU also plans to set aside more than 30% of its 750 billion euro Covid-19 economic rescue package that will be financed by green debt.
In the United States, issuance is being driven by large corporations seeking to demonstrate that they are adopting more responsible and sustainable policies – an attitude that has been heightened by the Covid-19 crisis – while China’s pledge to achieve carbon neutrality by 2060 is boosting green bond issuance in Asia, NN IP says.
The criteria used to assess green projects or activities are becoming better defined and increasingly includes independent opinions, although issuers self-label their bonds as green based on guidance from regulators, stock exchanges and market associations. The company warns, however, that only around 85% of green bonds deserve the label – the remainder are issued by companies that may use the proceeds for environment-friendly projects but which are involved in activities that incur negative impacts elsewhere. For example, a railway company could finance low-carbon transportation through green bonds while still being heavily involved in fossil fuel freight.
Bram Bos, NN IP lead portfolio manager for green bonds, comments: “Investors must do their homework and not blindly trust the green label. The projects financed by green bonds should deliver clear environmental benefits that can be assessed and quantified wherever possible. Unfortunately, companies can issue green bonds without having any intention of addressing their own core sustainability issues. A thorough evaluation of a company’s activities, future plans and intention to improve business practices is needed."
The company says investors can usually expect better performance from green bonds than their traditional peers. For example, the Bloomberg Barclays MSCI Euro Green Bond Index delivered an annual return of 3.2% between January 2016 and August 2020, or 70 basis points higher than the Bloomberg Barclays MSCI Euro Aggregate Index. Since 2015, green bonds have outperformed in every year except for 2017.
Says Bos: “There is increasing proof that green bonds give investors opportunities to support the environment and secure higher returns. Truly green bond portfolios exclude dirty issuers with stranded assets and finance companies that are more innovative and forward looking while being protected against climate and ESG risk.”