Dutch asset manager NN Investment Partners (NN IP) has argued that green bonds – corporate bonds in particular – have become an economic alternative for traditional bonds, thanks to their returns and volatility.
It said that a comparison between the Bloomberg Barclays MSCI Euro Green Bond Index and the Bloomberg Barclays MSCI Euro Aggregate Index over the past four years, had shown that green bonds had returned 7.4% last year, whereas traditional bonds had generated 6%.
It added that the asset class had outperformed by 70 bps on average during three of the past four years.
According to NN IP, the annual volatility of the green bond index had been higher for the last three years, which means that higher returns were largely thanks to higher risk.
It noted that the duration of the green bond index had significantly increased since the start of 2017, when France issued its first green bond of €7bn with a duration of 22 years.
The longer duration increased the susceptibility of the green bonds for interest rate changes. As interest rates had dropped further in 2019, the green bond index performed better than the aggregate index, NN IP explained.
The asset manager further found that green corporate bonds returned 6.4% in 2019, against 6.2% for traditional credit, and had outperformed in 2016, 2018 and 2019.
The manager said that annual volatility of green bonds was higher in each of the past four years, whereas the volatility of corporate bonds had decreased every year.
It added that the difference in volatility between the green and the non-green index was decreasing as a consequence of growth and an increased diversification of the green credit market.
It said that the duration of both indices is now almost equal.
Bram Bos, lead portfolio manager green bonds at NN IP, said the consistent outperformance of green bonds relative to tradional ones, confirmed that green bond issuers are less exposed to climate and environmental, social and governance (ESG) risks and are more transparent.
Green bonds are usually issued by innovative and future-oriented companies that take climate change into account.
Bos said NN IP’s analysis showed the indices for green bonds had become a real alternative for tradional bond indices.
He highlighted that NN IP only invested in “dark green” bonds with a measurable performance aimed at solving large sustainability problems, and therefore excluded 15% of the worldwide issued green paper deemed insufficiently green.