Contact

Menu

Article

Newsletter Index Solutions: green bond

From a “fig leaf” to an investment segment that has to be taken seriously: the number of green bonds issued has increased by more than 30% within a year and the number of issuers has risen too. Read more about how green bonds help fund climate and environmental projects and how you can combine attractive returns and sustainability with an index fund.

July 31, 2019

Jean-Philippe Spillmann

Portfolio Manager Index Solutions

Focus on global green bonds

The “Fridays For Future” resp. the school strike for the climate represent a widely acclaimed initiative, with the Swedish schoolgirl Greta Thunberg becoming known all over the world almost overnight. More and more people are concerned about climate protection, and more and more bond investors are including it and other ESG aspects1 in their investment decisions. At the same time, they are also increasingly ensuring that issuers don’t do greenwashing2.

The Bloomberg Barclays MSCI Global Green Bond Index only contains bonds that fund projects with a clearly outlined environmental benefit. The internal team of analysts has carefully analyzed the bonds in question to determine whether they satisfy the prescribed selection criteria known as Green Bond Principles.

Clear purpose for use of proceeds

Green Bond Principles are voluntary guidelines introduced in 2014 by the International Capital Market Association (ICMA), which reviews them annually. The central aspects in this process are the purpose of the funds and their monitoring.

  • Use of Proceeds: the issuer must use the capital to finance or refinance an environmentally friendly project.
  • Process for Project Evaluation and Selection: the issuer must describe in detail the process for project evaluation and selection. It must also define the aim of the project.
  • Management of Proceeds: an independent auditor must confirm that the issue proceeds are managed separately.
  • Reporting: the issuer must offer a minimum level of transparency. This involves reporting on the project’s progress and on the use of capital on a regular basis, at least once a year.

The funds go to climate and environmental projects

Funds raised through green bonds must go to projects in one of the following ten categories: renewable energy, energy efficiency, sustainable waste management, sustainable agriculture, conservation of biodiversity, clean transportation, sustainable water management, adaptation to climate change, recycling management products, and sustainable buildings.

For example, the electricity company Evergy issued a USD 350 million green bond in mid-2016 to build a wind farm in Kansas that supplies sustainably produced electricity. The capacity of the Western Plains Wind Farm is 280 MW, equivalent to the consumption of around 170,000 households.

Common features with standard bonds

Apart from the purpose for which the funds are to be used, green bonds have the same characteristics as standard bonds:

  • The issuer is liable for green bonds in exactly the same way as for other bonds. Green bonds have no special default-risk status.
  • The credit ratings of green bonds are generally at the same level as the issuer rating. The risks are therefore congruent with those of a standard bond.
  • Interest rate and currency risks are at the same level as those of standard bonds.

As a result, the return for the same currency and maturity is roughly at the same level as for standard bonds. In fact, the Bloomberg Barclays MSCI Global Green Bond Index which was launched in 2013 has even performed better than the very broad Bloomberg Barclays Global Aggregate Index (see following chart).

Performance of green bonds compared to standard bonds

Performance of green bonds compared to standard bonds
Source: Bloomberg, data as at 10.05.2019 Historical performance indications and financial market scenarios are not reliable indicators of future performance.

One important reason for the superior performance of sustainable bonds is their slightly longer duration. The allocation and selection of green bonds in the index also contributes to their performance.

Download this Insights paper and get the full picture of the growth of green bonds

1 ESG = environment, social, governance.
2 Greenwashing is a critical name to describe issuers that give their bonds an environmentally friendly image without an adequate basis to back up their claims.

Source: Credit Suisse, otherwise specified.
Unless noted otherwise, all illustrations in this document were produced by Credit Suisse Group AG and/or its affiliates with the greatest of care and to the best of its knowledge and belief. The information provided herein constitutes marketing material. It is not investment advice or otherwise based on a consideration of the personal circumstances of the addressee nor is it the result of objective or independent research. The information provided herein is not legally binding and it does not constitute an offer or invitation to enter into any type of financial transaction. The information provided herein was produced by Credit Suisse Group AG and/or its affiliates (hereafter “CS”) with the greatest of care and to the best of its knowledge and belief. The information and views expressed herein are those of CS at the time of writing and are subject to change at any time without notice. They are derived from sources believed to be reliable.CS provides no guarantee with regard to the content and completeness of the information and where legally possible does not accept any liability for losses that might arise from making use of the information. If nothing is indicated to the contrary, all figures are unaudited. The information provided herein is for the exclusive use of the recipient. Neither this information nor any copy thereof may be sent, taken into or distributed in the United States or to any U. S. person (within the meaning of Regulation S under the US Securities Act of 1933, as amended). It may not be reproduced, neither in part nor in full, without the written permission of CS. Investment principal on bonds can be eroded depending on sale price, market price or changes in redemption amounts. Care is required when investing in such instruments. Investments in foreign currencies involve the additional risk that the foreign currency might lose value against the investor’s reference currency. Equities are subject to market forces and hence fluctuations in value, which are not entirely predictable. The key risks of real estate investments include limited liquidity in the real estate market, changing mortgage interest rates, subjective valuation of real estate, inherent risks with respect to the construction of buildings and environmental risks (e.g., land contamination). Commodity investments and derivatives or indices thereof are subject to particular risks and high volatility. The performance of such investments depends on unpredictable factors such as natural catastrophes, climate influences, hauling capacities, political unrest, seasonal fluctuations and strong influences of rolling-forward, particularly in futures and indices. The underlying indices are registered trademarks and have been licensed for use. The indices are compiled and calculated solely by licensors and the licensors shall have no liability with respect thereto. The products based on the indices are in no way sponsored, endorsed, sold or promoted by the licensors. CSIF (LUX) Bond Green Bond Global Blue: This fund is domiciled in Luxembourg. The representative in Switzerland is Credit Suisse Funds AG, Zurich. The paying agent in Switzerland is Credit Suisse (Switzerland) Ltd, Zurich. The prospectus, the simplified prospectus and/or the Key Investor Information Document (KIID) and the annual and half-yearly reports may be obtained free of charge from Credit Suisse Funds AG, Zurich or from any branch of Credit Suisse AG in Switzerland.
Copyright © 2019 CREDIT SUISSE. All rights reserved.