Green bonds are emerging rapidly as a new category within fixed income.
The market has grown over the past few years and keeps on broadening in terms of countries, currencies, sectors and seniority/ranking.
Bram Bosm, green bonds portfolio manager at NN Investment Parnters, gives five reasons why green bonds matter.
Stress the responsible investing strategy
An allocation to a dedicated green bond portfolio is a clear statement that the investor is paying attention to climate change, impact investing and responsible investing. Internal and external stakeholders (for example a pension fund sponsor or insurance client) take note of a fixed allocation to green bonds, which fits in with a broader responsible investing strategy.
A consistent and visible exposure to green bonds
Green bonds currently are being issued in a broad range of fixed income sub-asset classes: sovereign, credits, emerging market debt and asset-backed securities. It is likely that every asset manager who manages a regular portfolio buys some green bonds. But highlighting green bond holdings in regular portfolios may give the wrong impression. Investors who are less compliant with environmental, social, governance (ESG) standards might ‘greenwash’ their holdings by using their green bond exposure to pretend they have strong ESG policies in place, when in fact they are more of a coincidence than a conscious choice. Another risk is that if one has for example an exposure of 5% to green bonds at a certain moment in time, this could be window-dressing and the percentage through the remainder of the year or past year may be much lower.
A clear definition of green: avoiding greenwashing
Current portfolios often include green labeled bonds, and as noted, this may be more of a coincidence then a conscious allocation. For these portfolios the manager often does not look at the type of projects that are financed and what green structure is bought into. The risk of greenwashing is high. For example, would you buy a green bond from an issuer who also finances (nuclear) weapon suppliers or trade arms in its regular business? If so, what is good practice and what is below market standards? The reputational risk is high if one takes the green label for granted.
More engagement with green bond issuers on ESG topics
One of the clear benefits of allocating separately to green bonds is the high level of potential engagement. Such allocations are not only more visible to internal and external stakeholders. They are also visible to green bond issuers, who prefer to engage with investors who have clear defined green bond mandates and portfolios. Issuers prefer to allocate more to dedicated green bond portfolios as this is a reliable and diversifying source of funding with a long time horizon.
Impact reporting
The green bond label is voluntary and everybody can label a bond green. That is why asset managers carefully analyse green bonds before they are issued in the market. The process does not stop there. After issuance it is an ongoing screening process to make sure that the issuer spends the proceeds according to their commitments. The impact of green bond funds is also important. How much carbon dioxide emissions are reduced by your investment in a green bond fund? What type of projects are being financed, and in which regions? The impact report is an important benefit of investing in a dedicated green bond fund.
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