Investing in green bonds

In this module within our Sustainable Bonds series, we will cover green bonds and how they can be used in a portfolio.

Green bonds finance projects that are focused on the transition to a low carbon economy. The projects that green bonds may cover can be quite broad but the majority sit within one of these environmental themes: green buildings, sustainable ecosystems, low carbon transport and smart energy solutions.

The first green bond was issued by the European Investment Bank in 2007, back in 2015 it was still seen as a niche investment. With the impact of climate change becoming increasingly apparent and growing regulatory requirement for transparency, governments, companies and investors have turned to green bonds. That green bonds are seen as a very appropriate instrument to fund Net Zero investments is demonstrated by the fact that governments are still using them for such projects: more than 20 countries already issued green bonds, Austria or Canada being recent additions in 2022

In just a few years, the asset class has grown to a critical size, weighting more than 1 trillion dollars. The asset class has seen the number of issuers grow from just a couple of supranational bodies and utilities to more than 600 issuers among which more than half are corporations and financial institutions This dynamic, that brings additional sector and regional diversification, is a trend we continued to see in 2022 with more than 100 new issuers coming to the market. ,

A key element of this asset class is their transparency and outcome-driven process; aspects that are unique to sustainable bonds within the fixed income universe. It means that investors are able to access detailed reporting on key performance indicators for the project and, therefore, assess the project’s greenness and measure its environmental benefit.

Data analysis is also confirming the success of the primary role of green bonds, to direct capital towards the financing needs of the transition to a low carbon economy. We have assessed the carbon intensity of projects financed by green bonds and found that the carbon intensity of these bonds is more than half that of their issuers. We believe this confirms the credibility of green bonds in supporting issuers into their net zero trajectory.

Along with offering investors an investment that reflects a positive outcome for the environment, green bonds may also provide a balanced risk profile that is a credible alternative to the traditional bond universe: a highly rated market equally split between sovereign or sovereign-related and corporate debts with relatively similar sensitivity to interest rate than the conventional universe.

We believe the positive impact and diversification that green bonds offer makes them an interesting asset class to invest in. However, not all green bonds are the same and ensuring that a portfolio consists of only those whose project meets key criteria and reflect the issuer’s sustainable strategy is important. By referencing the International Capital Markets Association’s guidelines for sustainable bonds, at AXA IM we have built a proprietary sustainable bond framework that defines and monitors eligible investments. This eligibility criteria reviews factors such as sustainability strategy, type of project and transparency.