INDEX WITH IMPACT WITH GREEN BONDS

As sustainable investing continues to gather momentum, we explore why we believe now is the time to consider green bonds.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Since 2018, sustainable fixed income indexing assets across the industry have more than doubled every year, with investors increasingly looking at sustainability as an important driver of returns. The pandemic has also accelerated reallocation within fixed income as traditional role of government bonds within portfolios has become increasingly challenged by a lower for-longer interest rate environment.

As investors search for new sources of yield and resilience, and interest in sustainable investments rises, demand for green bonds – and their issuance – are at all-time highs.

WHAT ARE GREEN BONDS?

Green bonds are fixed income instruments whose proceeds are exclusively applied towards new and existing ‘green’ projects. The primary purpose of a green bond is to raise capital and investment for projects with environmental benefits, such as renewable energy, green buildings, wastewater management, energy efficiency, and public transport.

WHAT ARE THE GREEN BOND PRINCIPLES?

Issuers need to follow the Green Bond Principles (GBP), voluntary process guidelines for transparency and disclosure that promote integrity in the development of the green bond market. The GBP are based on four components:

Image explaining the 4 green bonds principles.

GREEN BONDS: WHY NOW?

Issuance has grown steadily since the European Investment Bank launched the first green bond in 2007. Today, green bonds may offer multiple benefits, from high quality credit exposure to resilience. Amid a broader societal shift towards sustainability, green bonds may also help investors prepare for net zero alignment, mitigate environmental and climate risks, and understand the impact of these moves – all without incurring additional costs.

1. High quality exposure

With an average credit quality of A+1, the global green bond universe skews towards higher quality issuers such as multilateral development banks and government-backed agencies.

1 Source: Bloomberg as of 31 Mar 2021, using Bloomberg Barclays MSCI Global Green Bond Index.

2. Portfolio resilience

The increase in volatility in late February and March 2020 highlighted the importance of fixed income within portfolios, as investors returned to government bonds to weather the storm. It soon became clear that sustainable exposures were showing greater resilience than their parent exposures, with less drawdowns and lower volatility over the period2. On an issuer basis, green bonds performed in line with their non-green peers, as markets valued their credit worthiness on par3.

2,3 Source: 'Index with impact with green bonds', BlackRock, Apr 2021.

3. Downside risk mitigation: an environmental perspective

Broadly, issuance of a green bond signals that an issuer is incentivised to fund projects with environmental benefits – and may indicate positive momentum towards net zero alignment in the future.

While green bonds are not a direct hedge against exposure to climate risk, the asset class could help to mitigate climate risk by financing projects with climate benefits. For example, investors with high exposure to climate risk, such as insurers, may be expected to allocate more to green bonds.

4. Environmental impact…at no extra cost

The transparency afforded to green bond investors via impact reporting is a differentiating feature of the instrument. All green bonds must follow the Green Bond Principles and as such, report the environmental metrics of the projects funded by their proceeds on an annual basis. Historically, it has been challenging to capture the aggregated impact from multiple green bond holdings, as reporting is not standardised and projects may fund improvements across multiple metrics. BlackRock is the first asset manager to offer portfolio level impact reporting for a co-mingled green bond product helping investors to track and understand the true impact of an investment.

A long-term study by BlackRock of green bonds from 40 major US dollar and euro issuers (government and corporate) showed that there was no material pricing difference between green and non-green bonds4. Credit risk was identical, as was liquidity. The same study also found no material difference in bid-offer spreads. This indicates that investors may be able to access green bonds that provide real transparency on their environmental benefits, without paying extra to do so.

4 Source: “Towards a new paradigm: fixed income in ESG” whitepaper by BlackRock, 31 Mar 2021.

INDEX WITH IMPACT WITH GREEN BONDS

Read our whitepaper to discover why we believe now is the time to invest in green bonds.

WHY INDEXING?

  • A transparent, standardised approach to green bond investing, with each green bond held to the same index criteria (no matter the sector or issuer) and with holdings data available daily
  • May offer diversification benefits and resilience during periods of market volatility, as 2020 demonstrated
  • Active investment stewardship is involved in green bond indexing to drive long-term change

WHY iSHARES?

Investment expertise

iShares manages US$21.3B in green bonds and was voted one of the top three “most impressive green/SRI investment firms” for 2018 by GlobalCapital.

Impact reporting

iShares created a harmonised template for impact reporting metrics for a group of issuers, allowing investors to communicate positive impact and set standard for market.

Dedicated partner

iShares is an Executive Committee member of the Green Bond Principles & a member of the Climate Bonds Initiative.

BlackRock is helping to shape the development of the green bond market and protect its integrity by clarifying the approach for green bond issuance – including guidance on key components of the launch process, ensuring availability of necessary information for environmental impact assessment, and assisting with the standardisation of disclosure processes.