The green bond revolution

18 Oct 2016

Green bonds are likely to play a key role in how investors switch to clean energy, but is the asset class right for everyone? Emma Cusworth investigates.

“There are not many suitable [green bond] offerings. This is the biggest limitation for us – sterling green bond issuance is only a fraction of the total.”

Mark Mansley, Environment Agency Pension Fund

Green bonds look set to revolutionise not just the speed at which the world transitions to clean energy, but also how broader bond markets work. The rapid growth of the asset class, which is well supported for continued acceleration, underlines asset owners’ increasing interest in accounting for climate change risk in their portfolios.

According to the Climate Bond Initiative (CBI), there are now $694bn in outstanding climate-aligned bonds, an increase of $96bn (or 16%) since the same analysis was conducted the previous year. Within that total, $118bn are “labelled” green bonds – those that have been certified by the CBI to say the funds raised from their issue will be used to finance new and existing projects with environmental benefits. Green bonds saw record issuance during 2015 with $42bn issued meaning this sub-section of bonds now account for 17% of the broader climate bond market, an increase from 11% the previous year.

INSTITUTIONS DRIVE DEMAND

“Most of the demand is coming from institutions who by nature have a long-term time horizon and are exposed to the consequences of climate change,” says Bram Bos, lead portfolio manager for NN IP’s Euro Green Bond fund. He points to the risk of exposure to stranded assets (such as oil reserves that will no longer be exploitable as regulations tighten) or higher insurance claims resulting from flooding.

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