Institutional investors are constantly searching for the elusive ‘no-brainer’ investment: the one that offers clear additional benefits without additional risk or cost.
Green bonds seem to be the right investment for those wishing to make an impact in the world with limited downside against their convertible counterparts. In the past few years, the green bond market has experienced explosive growth.
Germany, France and the Netherlands – and most recently the UK – have issued sovereign green bonds, in addition to the European Commission which only a few weeks ago issued its very own first green bonds, attracting more than €135bn (see page 13). It plans to issue a total of €250bn by 2026.
However, BT Pension Scheme (BTPS) and Universities Superannuation Scheme (USS), two of the UK’s largest pension funds, did not back the UK deal, a €10bn 12-year issue that drew some €100bn in demand from mostly domestic buyers.
Green bonds have historically offered similar – if not higher – return profiles to their non-green counterparts.
According to the latest Climate Bonds Initiative (CBI) ‘Green bond pricing in the primary market H1 2021’ report, on average, green bonds are still attracting more interest from investors than non- green bonds, while also achieving higher book cover and greater spread compression.
The report also reveals that green bonds can offer investors more flexibility in the secondary market, which may help to justify the greenium – the spread of a green bond to the issuer’s non-green curve – where present.
Recent research by ING has found that the savings on green issuance for borrowers range between 1bps and 10bps on a global basis.
Over the past 12 months more and more investors have stated their own net-zero targets as they also commit to stronger reporting regulations – green bonds support these objectives.
But investors are also looking for quality green and climate-friendly debt products and this structural trend in demand will only intensify in the coming years. This will continue to combine and drive the persistence of a greenium in debt capital markets.
Venilia Amorim, Editor, IPE.com