Sustainability as an investment theme looks set to be a permanent feature of the asset management landscape. One sustainable asset class that is gaining increasing prominence is ‘green bonds’, or bonds in which the proceeds must be spent on projects that support the environment. But how keen are investors to “greenify” their portfolios?
NN investment Partners (NN IP) carried out a poll amongst investors which found that green bonds are the most popular sustainable fixed income instruments among institutional investors, with 45 per cent saying they make the greatest positive impact. This was followed by sustainability linked bonds (37 per cent), social bonds (11 per cent) and transition bonds (7 per cent).
But the greatest barrier to green bond investing is the perception of inferior investment returns, according to 44 per cent of respondents, followed by fear of greenwashing (38 per cent) and insufficient market capacity (19 per cent). More than three in five respondents (63 per cent) say they would use green bonds as an ‘impact bucket’ separate from their traditional bond allocation, whereas 20 per cent would use them to replace corporate bonds and 17 per cent to replace government bonds.
Bram Bos, Lead Portfolio Manager Green Bonds, NN Investment Partners, comments: “It is no surprise that green bonds are clearly the most popular sustainable fixed income instruments because they constitute the most mature and liquid market. They are probably the most effective way for fixed income investors to enhance the impact they make without sacrificing returns. At times, yields might be a little bit lower but over the last seven years, on average a euro-denominated green bond portfolio has generated 40 basis points more than a regular bond portfolio, and for corporate bonds, the difference is 60 basis points.”
Although there are several passive alternatives available in the market, NN IP believes there are two key reasons that investors should favour active investing in green bonds.
Douglas Farquhar, Client Portfolio Manager Green Bonds, NN Investment Partners, comments: “As green bonds are self-labelled instruments, you need to do in-depth research that assesses both the green projects being financed and the issuers themselves to mitigate the risk of greenwashing. Second, green bond markets are not always efficient. Sentiment and supply/demand changes can influence valuations, while rating agencies may lag behind when it comes to reflecting changes in credit fundamentals. So active management and doing your own research are essential to identify value opportunities ahead of the market and avoiding greenwashing. A clear philosophy, a dedicated team and a solid track record are all important criteria for selecting a green bond manager.”
