Netherlands-based asset manager NN Investment Partners (NN IP) released its forecast for the global green bond market today, estimating that the market will grow from its current level of €662 million to €1 trillion by the end of 2021, and then doubling to €2 trillion by the end of 2023.
Green bonds securities issued specifically for financing environmental and climate-related projects. Green bond issuance has been growing strongly over the past several years, with global issuance increasing more than 45% year-over-year in 2019. While the COVID-19 pandemic caused the market to pull back early this year, issuance has bounced back strongly since the end of Q1 2020.
Some of the key drivers listed by NN IP include the implementation of the European Union’s Green Bond Standard, which will likely boost the already growing popularity of green bonds by European issuers, and may serve as a global standard helping to improve transparency and reporting in the sustainable fixed income market, as well as the European Commission’s plan to finance 30% of its €750 billion COVID-19 economic rescue package for with green debt. NN IP stated that issuance in the US is being driven by large corporations seeking to demonstrate they are adopting more responsible and sustainable policies, and in Asia, following China’s stated ambition to achieve carbon neutrality by 2060. Additionally, demand from investors is growing as they aim to ‘greenify’ their portfolios.
NN IP noted the green bond market is maturing, as the criteria used to assess green projects or activities is becoming better defined and increasingly includes independent opinions. The asset manager warned, however, that only around 85% of green bonds deserve the label, with the remainder being issued by companies that may use the proceeds for environment-friendly projects but which are involved in activities that incur negative impacts elsewhere.
Bram Bos, Lead Portfolio Manager Green Bonds, NN Investment Partners, said:
“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.”
According to NN IP, the performance of green bonds has been stronger than benchmark bond indices over the past few years with the Bloomberg Barclays MSCI Euro Green Bond Index delivering an annualized return of 3.2% between January 2016 and August 2020, 70 basis points higher than the Bloomberg Barclays MSCI Euro Aggregate Index, and green bonds have outperforming in 4 of the past 5 years
“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.”