Green bond fund AUM more than doubles in one year

The rising popularity and issuance activity of green bonds is leading to significant growth in green bond funds – both in terms of the number of funds and the assets under management.

Bonds whose proceeds are used exclusively to finance environmental projects are gaining in popularity. In the first half of this year, USD 118bn of green bonds were issued worldwide, corresponding to growth of 48 per cent since the first half of the previous year. Investor interest is unbroken, with new issues often heavily oversubscribed. Germany is the fifth largest bond issuer worldwide by issue volume. The German government also plans to launch a green bond next year.

Strong demand for sustainable investments, especially among institutional investors, has led to further issues of green bond funds this year. As of the end of October 2019, 29 green bond funds were approved for sale in Germany (compared to 24 in October 2018). New funds were launched by Franklin Templeton, Degroof Petercam AM, Lyxor and Colchester Global Investors.

The 29 funds have a total volume of just under EUR 5.8bn. That’s an increase of about 150 per cent compared to the figure in Scope’s study from the previous year. The largest fund is NN (L) Euro Green Bond, with a volume of almost EUR 1.1bn and currently the only fund exceeding the billion mark. Over 85 per cent of green bond funds are actively managed.

All funds achieved positive returns of between 0.8 per cent and 9.7 per cent by the end of October 2019. In comparison, the 101 funds in Scope’s ‘Bond EUR Global’ peer group achieved an average return of 5.5 per cent in the current calendar year. Almost three-quarters of the 29 green bond funds performed better – in some cases significantly better.

All of the funds have minimum standards for ESG (environment, social and governance) that an issuer must meet to be eligible for investment. These include the application of exclusion criteria, positive environmental screening and impact reporting. Most frequently excluded from portfolios are weapons producers and other controversial sectors such as tobacco or coal production.

The majority of funds focus on environmental criteria when selecting bonds. Not content with the Green Bond Principles developed by the International Capital Markets Association, most asset managers have implemented their own green bond guidelines and ESG checks to monitor issuers. Almost all the funds’ green bond checks include a positive opinion from a second party.

Growth in green bond issuance is set to continue. In addition to green bonds, Scope also expects more issues of social and sustainable bonds. With around 25 funds dedicated to green bonds, there seems to be little room for further growth. However, among conventional bond funds, the number of dedicated bonds added has risen sharply, ie sustainable, social and UN Sustainability Development Goal (SDG) bonds.