Newsletter Index Solutions:
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.
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
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.