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Magazine Issues » April 2021

Opinion: Greening the bond markets

Fiona_RintoulIt’s getting harder not to be green. This is nowhere more apparent than the bond markets. Late to the party, bonds are greening so fast you can almost see them changing tinge.

At the beginning of April, NN Investment Partners (NN IP) launched the NN (L) Sovereign Green Bond fund, the first sovereign bond fund that aims to make a positive environmental impact through the projects it finances. Meanwhile, NN IP’s range now offers investors the flexibility to allocate to green bonds that replicate the characteristics of traditional bonds.

“Whilst in the past, investor demand for green bonds mainly came from impact investors, we now see more typical fixed income investors allocating to green bonds as well,” says Bram Bos, lead portfolio manager for green bonds at NN IP. “These investors are looking to make their portfolio more sustainable without sacrificing financial performance.”

Europe leads the way in the green bond segment and overall, both NN IP and BNP Paribas believe global green bond issuance this year could increase by 50% from last year to €400 billion. This would put the total market above €1 trillion, and NN IP expects it to grow to €2 trillion by the end of 2023. This is a drop in the ocean of the €100 trillion-plus global bond market, but then the greening of bonds is not just about green bonds.

Bond issuers are coming under the same pressure from fund managers and other activist investors to report on and conform to ESG criteria as equity issuers. Later this year, BNP Paribas expects the European Central Bank (ECB) to join the fray.

In its Q2 2020 Global Outlook, the French bank says it expects the ECB’s next strategy review, due in September, to include two sets of sustainability measures in line with the ECB’s “green tilt”. BNP Paribas anticipates that a protective approach designed to shelter the ECB’s balance sheet from climate change-related risks will be married with a proactive approach.

The ECB “is likely to deviate from market neutrality in its corporate asset purchases by underweighting issuers with higher climate-related risks,” says BNP Paribas. It does not expect the ECB to sell the bonds of heavy emitting industries or to launch programmes that exclusively buy green bonds, but any departure from neutrality is a form of meddling that leaves bond analysts acting as central bank watchers. Within the green bond sector, meanwhile, a potential problem is what BNP Paribas calls the “greenium” on sovereign, supranational and agency green bonds. “We expect the premium on sustainable debt to be outstripped further by demand outstripping supply,” it writes. “This is especially true in the 20-year-plus sector, where scarcity of sustainable duration makes those issues particularly expensive versus conventional debt.”

The greening of bonds is far from straightforward. Aviva Investors, which is hosting a virtual discussion on how bond markets can support the climate transition on May 11, says fund managers’ challenges include dealing with smaller, private high-yield issuers on ESG and differences in engagement between sovereigns in developed and emerging markets.

Getting it right can bring rich rewards, however – particularly on the corporate side, where fund managers can conduct an equity and bond pincer movement. As the head of ESG strategies at Amundi, Andrea Salvatori, told me recently during a conversation about net-zero 2060 in China, coming at companies from both sides can be “very impactful”.

Fiona Rintoul, editor-at-large at Funds Europe

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