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