Global green bond market set to hit EUR 2 trillion in three years, says NN Investment Partners

Growth will be driven by strong investor demand and better standards in the market, even though NN IP warns that around 15% of green bonds are still issued by companies involved in controversial practices

Content Manager at RankiaPro

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The global green bond market is set to grow from around the current level of EUR 662/672 billion to EUR 1 trillion by the end of 2021 and EUR 2 trillion by the end of 2023, according to NN Investment Partners (NN IP). However, the company warns that investors need to scrutinise the credentials of green bonds because around 15% of issues are from companies involved in controversial practices that contravene environmental standards.

Key drivers of this market growth include the strong demand from investors wishing to ‘greenify’ their portfolios and the rapidly growing popularity of green bonds among European issuers, which will be further boosted next year when the European Union’s Green Bond Standard is implemented. This is likely to become the global standard for green bonds and further improve transparency and reporting in the sustainable fixed income market. The EU also plans to set aside more than 30% of its EUR 750 billion COVID-19 economic rescue package for projects that will be financed by green debt.

In the US, issuance is being driven by large corporations seeking to demonstrate they are adopting more responsible and sustainable policies – an attitude that has been heightened by the COVID-19 crisis – while China’s stated ambition to achieve carbon neutrality by 2060 is boosting green bond issuance in Asia.

Green bonds are similar to their traditional counterparts but are specifically used to finance projects that have environmental benefits. They are an effective tool for issuers to finance climate transition and for investors to make a measurable positive impact on the environment.

The criteria used to assess green projects or activities is becoming better defined and increasingly includes independent opinions, although issuers self-label their bonds as green based on guidance from regulators, stock exchanges and market associations. NN IP warns, however, that only around 85% of green bonds deserve the label – the remainder are issued by companies that may use the proceeds for environment-friendly projects but which are involved in activities that incur negative impacts elsewhere. For example, a railway company could finance low-carbon transportation through green bonds while still being heavily involved in fossil fuel freight.

“Investors must do their homework and not blindly trust the green label. The projects financed by green bonds should deliver clear environmental benefits that can be assessed and quantified wherever possible.”

“Unfortunately, companies can issue green bonds without having any intention of addressing their own core sustainability issues. A thorough evaluation of a company’s activities, future plans and intention to improve business practices is needed. At NN IP we seek more transparency through engagement so we can ensure we do not invest in bonds or companies that are not as green in reality as they might appear to be.”

Bram Bos, Lead Portfolio Manager Green Bonds, NN Investment Partners

Analysis by NN IP shows that investors can usually expect strong performance from green bonds versus their traditional peers. For example, the Bloomberg Barclays MSCI Euro Green Bond Index delivered an annual return of 3.2% between January 2016 and August 2020, which was 70 basis points higher than the Bloomberg Barclays MSCI Euro Aggregate Index. Since 2015, green bonds have outperformed in every year except for 2017.

“There is increasing proof that green bonds give investors opportunities to support the environment and secure higher returns. Truly green bond portfolios exclude dirty issuers with stranded assets and finance companies that are more innovative and forward looking while being protected against climate and ESG risk.”

Bram Bos, Lead Portfolio Manager Green Bonds, NN Investment Partners

NN IP has published a free Green Bond Buyer’s Guide for investors. It provides an overview of what constitutes a green bond, how the market has developed and demonstrates why green bonds deserve a place in every fixed income portfolio. The guide is available here.

NN IP’s green bond portfolios currently finance projects that reduce annual CO2 emissions by over 1.5 million tonnes, which is equivalent to the emissions of 96,068 households.

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Global green bond market set to hit EUR 2 trillion in three years, says NN Investment Partners