The global green bond market is set to grow from around the current level of €662/672 bn to €1 trn by the end of 2021 and €2 trn by the end of 2023, according to NN Investment Partners (NN IP).
However, investors are advised to scrutinise the credentials of green bonds because around 15% of issues are from companies involved in controversial practices that contravene environmental standards. For example, a railway company could finance low-carbon transportation through green bonds while still being heavily involved in fossil fuel freight.
There is currently no uniform green-bond standard within the European Union. However, the Green Bond Standard (GBS) announced this year by the EU, closely aligned with the International Capital Market’s Green Bond Principle, sets out the three necessary requirements for a green bond: green-bond framework, proceeds to green projects and external verification – obtaining additional endorsement from a second party
Bram Bos, lead portfolio manager green bonds, NN IP, said, “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.”
He added, “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. “
According to NN IP, EU countries leading the pack include France as well as Germany who sold its first green sovereign bond last month – €20bn issuance from KfW, the state-owned development bank. Italy, Spain and Portugal are likely to follow suit.
In the US, issuance is being driven by large corporations seeking to demonstrate they are adopting more responsible and sustainable policies – an attitude that has been heightened by the COVID-19 crisis – while China’s stated ambition to achieve carbon neutrality by 2060 is boosting green bond issuance in Asia.
Green bonds are similar to their traditional counterparts but are specifically used to finance projects that have environmental benefits. They are an effective tool for issuers to finance climate transition and for investors to make a measurable positive impact on the environment.
Analysis by NN IP shows that they have outshone their more 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, which was 70 basis points higher than the Bloomberg Barclays MSCI Euro Aggregate Index. Since 2015, green bonds have outperformed in every year except for 2017.