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Growing green bonds could help the environment

Green investment mtime20191127101708

Climate change is seen as one of the main sources of risk for global economies and societies. Green bonds represent one instrument to finance the move towards a lower-carbon economy. While resembling traditional corporate bonds in many ways, the defining feature of green bonds is their use of proceeds specifically for projects alleviating environmental impact.

With the first green bond issued in 2007, the market has seen strong growth in the following decade and new green bond issuances reached the USD216bn mark in 2019 with an estimate of USD250bn by end of the year. However, further investment is needed to mobilise the transition into a low-carbon economy and to reach the UN Sustainable Development Goals.

This year we provided supporting analysis for a newly-published report by the Climate Bond Initiative (CBI) - the first Green Bond European Investor Survey. 48 of the largest Europe-based fixed income asset managers were surveyed to gain a comprehensive understanding of how the fixed income investment community is addressing or intending to address climate change through investment decisions, and to identify measures that could help to grow the green bond market from an investor’s perspective.

The survey found that there is a strong appetite for green bonds but a lack of green bond supply to meet investor demand. Asset managers would prefer to invest more in corporate and sovereign issuances with high climate impact – for example, mitigation of pollution levels, investments with high green credentials and transparency, and in sectors such as industrials, utilities, consumer discretionary (e.g. automotive), energy and materials.

Investors also report to value green credentials, both pre- and post-issuance, and the majority of investors would sell green bonds if the post-issuance reporting was poor. Policy is viewed as one of the most effective ways to scale up the green bond market, with standardisation of definitions being a priority. Tax incentives and differentiated capital treatment of low- versus high-carbon assets, designed to channel investment from high- to low-carbon assets, are also regarded as having high potential.

These findings have important implications for regulators and investors. While investors have the ambition to address climate change challenges through targeted investments, the market lacks adequate supply of green bonds. Implementing some of the recommendations expressed by European asset managers has the potential to provide support for the growth in green bonds, and ultimately increase the number of projects aimed to reduce environmental impact.

Read our news story about the report here.

Published 27 November 2019
Leading insights

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