The quiet evolution of ‘green’ bonds in global portfolios
- 01 July 2025 (3 min read)
KEY POINTS
The green bonds market is maturing as an asset class and with this maturity, it is beginning to enjoy global relevance. With €448 billion in issuance last year, Europe is still the engine1 , however what is important to note is that once issuers enter the green bond market, they tend to come back. For this reason, we expect many of those bonds issued in 2024 to roll-over.
It is not just Europe fuelling demand. There’s also increasing engagement from clients in Asia and Australia or EM. Regulation, transparency, and sustainability commitments are creating the same conditions for growth that we saw in Europe ten years ago. Likewise, governments beyond European borders continue to embrace green bonds – China, for example, issued its inaugural green bond this year. With sovereigns still stepping into the market, the size and legitimacy of the green bond universe, therefore, continues to be boosted.
We have also observed that green bonds have performed well compared with traditional benchmarks in recent years, which we see as a positive reflection of their structure: The green bond universe has a higher allocation to credit — around 50% – to that of the global aggregate market. It also has a higher sensitivity to Euro rates. These differences are key driver of relative returns, especially in benign markets as average duration and ratings are roughly the same as aggregate indices.
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Today, they are also priced similar to that of a conventional bond. Gone are the days when green bonds were slightly more expensive. Now, the ‘greenium’ is, on average, about one basis point making the price impact negligible.
Nevertheless, with no universal definition of a green bond, it’s important for investors to tread carefully. Labels exist, but they are voluntary, so conducting in-depth due diligence is crucial. We assess the issuer to ensure it is credible and committed to Net Zero, and the underlying projects to confirm that they are truly aligned with climate goals.
The green bonds universe has matured and investors are beginning to see it as a core part of their fixed income allocation. However, there are some hurdles to overcome, especially around regulation, which is why we believe that taking an active, disciplined approach to this market is important in order to reflect the best opportunities in this asset class.
For these reasons, we believe that green bonds are an efficient instrument for aligning fixed income portfolios with sustainability objectives without compromising risk or return. This is because regardless of the size of the market, what matters is the direction: If you want your portfolio more aligned to Net Zero, it is important to invest in climate-aligned issuers and projects. Green bonds offer this and a powerful channel for engagement.
Of course, today green bonds are more than just about reflecting ESG factors. They can also offer investors a range of other outcomes:
Mitigating risk
With the same characteristics as conventional bonds (arguably more as they offer greater transparency), green bonds could be an option for investors seeking to move away from riskier assets and mitigate against market uncertainty through a fixed income allocation.
Return potential
For investors looking for the potential of higher returns than generally achieved in conventional aggregate portfolios, green bonds may be a consideration due to the market’s greater allocation to credit.
Reduce exposure to US
The US has never been a core contributor to the green bond market and is unlikely to grow its market share in the near-term; green bonds, therefore, offer investors looking to reduce their exposure to the US a credible, straightforward option.
So, for many investors it is not simply about investing to feel good — it’s about accessing quality exposure, with additional transparency and impact. While there are still tracking error challenges when comparing green bond funds to conventional bond funds, for those investors able to look beyond tracking error, we believe it is a very efficient allocation.
Article based on https://insideadviser.com.au/the-quiet-evolution-of-green-bonds-in-global-portfolios/
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