Other concerns that could deter investors include a lack of liquidity, which is partly a result of the size of the market. Demand exceeding supply is another concern for some investors, which means that green debt has tighter spreads. “It is a market where demand is outstripping supply,” Manuel says. “This is why investors are willing to pay a small margin in terms of yield over conventional issuance.”
The spreads are reported to be improving. “In the past we have seen some of these bonds price with a tighter spread than nongreen bonds,” Freedman says. “That is not necessarily the case now. We see similar spreads on new green bond issues.”
For Invesco Perpetual’s De Coninck-Lopez there are other problems that the size of the market brings. She says that green bonds can come at a valuation premium due to high demand and shortage of issuance. This may in some cases reduce their attractiveness for mainstream investors.
Freedman says that in the event of a market selloff or a spread widening environment, you would expect to see more buy and hold invested in green bonds. “You probably have less selling and less spread widening in green bonds,” he adds. “I wouldn’t say that it is completely illiquid and totally un-investible – it is investable – you just have to be conscious of what you are investing in.”
Manuel describes green bonds as “just one part of the toolkit for progressing the low carbon economy”. The primary route for investors remains equities, with the fixed income market an alternative route to achieve their sustainability investment goals. “This is just one part of it and the fact that it is growing is great,” Manuel says.