It seems logical that bonds sold specifically to finance projects deemed beneficial to the environment should trade at higher prices and lower yields than vanilla debt. At the margin, funds dedicated to following environmental, social and governance principles can buy the former but not the latter; so the universe of potential buyers for green debt is just that bit bigger. Moreover, investors in theory would be willing to sacrifice some yield in exchange for the knowledge that their money is benefiting the planet. And yet any meaningful premium seems absent.
At first glance, the returns available from green bonds in the past half-decade have outpaced the broader market by a narrow margin. The Bloomberg Barclays Euro Green Bond Index shows a total return of 18% since 2014, not much different from the 16% gain in the broader investment grade index but beating the 13.5% that investors have made in euro corporate debt.
And while the green returns seem to accelerate in recent months, the data show that those bonds have added a bit more than 9% in the past year, almost identical with the gain in investment grade debt.
There’s an issue with that comparison, though. The euro corporate index contains more than 2,800 bonds worth 2.3 trillion euros, versus just 200 issues with a value of 207 billion euros in the green bond index. The European investment grade index dwarfs both, with almost 7,300 bonds worth 15.3 trillion euros.
Moreover, a single bond issued by the French government with a total size of 21 billion euros dominates the green index, with a weighting of almost 13%. The index is also stuffed with bonds sold by the AAA rated European Investment Bank, and the German state development bank KfW, which also has the highest credit rating. So its usefulness for measuring returns is limited.
What do individual bonds from a single issuer tell us? That French bond is the big beast in the green market after several increases since its initial sale in January 2017. At launch, it was priced to yield 13 basis points more than a non-green counterpart. Since then, it has traded in lockstep with other French government debt of similar maturity.
There’s a similar trend in the Dutch government bond market, where a green bond sold in May — the first from a AAA rated government — has maintained its yield relationship with non-green debt with similar maturities.
And in the U.S., a study of municipal bonds published earlier this month by David Larcker and Edward Watts of Stanford University showed that 640 matched pairs of bonds issued on the same day by the same municipalities with identical maturities displayed an “economically trivial difference in yield.” For 85% of the securities, yields were identical. “Investors appear entirely unwilling to forgo wealth to invest in environmentally sustainable projects,” the authors conclude.
The climate crisis has put the spotlight on the financial community as the provider of capital that can make or break the planet. Green bonds are a useful part of the armory, provided the proceeds really are used for the benefit of the environment and not just greenwashing. As more money flows into ESG-friendly securities, it seems likely that they will eventually trade at a premium to the rest of the debt market — at which point the early adopters will reap the rewards for getting in ahead of the pack.
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Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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