Sales of bond funds specialising in environmental, social and governance (ESG) issues totalled $54bn in the first five months of 2021 compared with almost $68bn for all of 2020, according to research from Morningstar.
The data covers open-ended funds and exchange traded funds globally.
Assets under management in the products increased 14% to $374bn between January and May, while they have almost tripled in three years.
In the first quarter, Morningstar figures show that assets in green bond funds totalled $25 bn with the bulk (82%) slotted into active funds and the remainder in passive funds.
It said that to date, the increase is largely driven by net new flows.
Total flows in 2020 amounted to $10 bn, up from $4.7 bn the previous year. Flows in the first three months of 2021 were $2.7 bn.
Morningstar identified 76 funds–67 active and nine passive–currently available for sale whose declared investment objective is to provide exposure to the green bond market.
Europe is in the lead at 65 followed by the US, at seven, Asia, 2, and Canada and Australia with one each.
Jose Garcia-Zarate, associate director at Morningstar, said the bulk of green bond issuance emanates from Europe, and governments and the European Union are becoming key players in this market.
He added that this is partly driven by regulatory and policy drivers such as the Paris Agreement and the European Green Deal, a set of policy initiatives by the European Commission to make Europe climate-neutral in 2050.
The EU’s €750bn Recovery Fund which aims to fight the effects of the coronavirus pandemic, has also had an impact. It plans to raise around 30% of the capital with green bonds.
In terms of investor behaviour, Garcia-Zarate said that investors in a global green bond portfolio would typically take on more credit and duration risk compared with a traditional global aggregate bond portfolio.
He added that green bonds bring additional credit risk in aggregate, with more exposure to BBB rated bonds compared with a plain-vanilla global bond offering.
Garcia-Zarate also noted that the green bond contingency heavily tilted toward euro-denominated bonds at the expense of their US dollar counterpart.
He said it’s more heavily skewed toward corporate, agency, and supranational bonds, while government bonds are significantly less represented.
However, their weight is expected to grow in the future.
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