Wealth DFM: So why now for green bonds in investors’ portfolios? What are the benefits which these green bonds can offer?
CME: We’ve come such a long way from 2007, when the first green bond was issued by the European Investment Bank. With the market becoming much larger and with growth in the diversity of issuers too, that has really changed the role that green bonds can play within an investor’s portfolio.
I see it from two perspectives:
The first is from the perspective of the fixed income characteristics the green bonds can offer a portfolio. The second is from the perspective of the environmental characteristics.
Firstly, from a fixed income perspective, two characteristics stand out. One – if we look at broad green bond market exposures. For example, the index that is tracked by our iShares Green Bond Index Fund is the Bloomberg, Barclays MSCI Global Green Bond Index. This offers investors an average credit quality of A+. That is an increase on the average credit quality that you might get compared to a non-green, broad aggregate index. The increase in credit quality comes from exposure to higher quality issuers such as multilateral development banks and government-backed agencies.
The second is from a performance perspective. Sustainable indexed fixed income offers investors greater resilience during periods of risk off and that resilience is driven by fixed income factors.
We see some of those same characteristics in these broad green bond market exposures. For example, last year during periods of volatility, and over the course of 2020, the Bloomberg Barclays Global Green Bond Index outperformed the Bloomberg Barclays Global Aggregate Index.
This outperformance did not come from the fact that green bonds outperformed non-green bonds. On a bond by bond basis, we see green bonds perform in line with their non-green equivalents. Instead, that outperformance came from the sector differences in broad green bond exposures in comparison to those non-green universes.
From an environmental perspective, there are positive implications when an issuer comes to market with green bonds, for example, it could be indicative of an issuer looking to align themselves with net zero in the future. Many investors that we talk to are increasingly looking to incorporate climate risk considerations into their portfolios.
From that perspective, a green bond investment helps mitigate some of those climate risks. That can be achieved and seen through the impact reporting which is part of the Green Bond Principles that every green bond issue reports annually on environmental metrics from projects funded.
The difficulty for investors is how do I aggregate my overall impact when I’m holding multiple green bonds? This is because green bonds will report on different metrics, and they do not report at the same time or in the same way. At Blackrock, we’ve worked very hard to create a portfolio level impact report and were first in market to do this for the iShares Green Bond Index Fund. This allows investors to quantify the positive environmental metrics that come from an investment in green bonds.
Continue reading article…