Global green bond market will reach EUR2 trillion in three years, says NN Investment Partners

Green cities

The global green bond market is set to grow to EUR 1 trillion by the end of 2021 and EUR2 trillion by the end of 2023, according to NN Investment Partners (NN IP). 

NNIP says the current market is worth between EUR 662 and 672 billion, but warns that 15 per cent of today’s issues are from companies involved in controversial practices that contravene environmental standards.

Demand for green bonds has soared as investors seek to ‘greenify’ their portfolios, which has been matched by rising issuance among European companies. 

NNIP expects this will see a further boost when the European Union introduces its Green Bond Standard in 2021, which it says is “likely to become the global standard for green bonds”. 

The European Union also plans to set aside more than 30 per cent of its EUR 750 billion Covid-19 economic rescue package for projects that will be financed by green debt.

In the US, issuance is being driven by “large corporations seeking to demonstrate they are adopting more responsible and sustainable policies”, an attitude that NNIP says has been heightened by the Covid-19 crisis. 

China is also expected to boost green bond issuance in line with its stated ambition to achieve carbon neutrality by 2060.

Bram Bos, lead portfolio manager of Green Bonds, at NN Investment Partners, comments: “Investors must do their homework and not blindly trust the green label. The projects financed by green bonds should deliver clear environmental benefits that can be assessed and quantified wherever possible.” 

“Unfortunately, companies can issue green bonds without having any intention of addressing their own core sustainability issues. A thorough evaluation of a company’s activities, future plans and intention to improve business practices is needed. At NN IP we seek more transparency through engagement so we can ensure we do not invest in bonds or companies that are not as green in reality as they might appear to be.”

Analysis by NN IP also shows that investors can usually expect strong performance from green bonds versus their traditional peers. For example, the Bloomberg Barclays MSCI Euro Green Bond Index delivered an annual return of 3.2 per cent between January 2016 and August 2020, which was 70 basis points higher than the Bloomberg Barclays MSCI Euro Aggregate Index. Since 2015, green bonds have outperformed in every year except for 2017.

Bos adds: “There is increasing proof that green bonds give investors opportunities to support the environment and secure higher returns. Truly green bond portfolios exclude dirty issuers with stranded assets and finance companies that are more innovative and forward looking while being protected against climate and ESG risk.”