Green bonds – first issued by the European Investment Bank (EIB) in 2007 and previously dismissed by some sceptics as a mere public relations stunt – celebrate their tenth anniversary this year.
While the market still accounts for less than 1% of the overall global bond market, growing interest in sustainability and impact investing is making demand outstrip supply, and forcing more investors (and issuers) to take note.
Spurred on by myriad ethical and financial reasons, the budding market is anticipated to reach issuance of $123 billion this year – a near 30% increase on last year’s $95 billion (see Figure 1).
Figure 1: Exponential green growth
Source: Bloomberg New Energy Finance
For issuers of such bonds, one advantage is greater exposure to institutional investors, such as pension and sovereign wealth funds, who are increasingly interested in gearing their portfolios towards more sustainable organisations and financial products.
Japan’s Government Pension Investment Fund, for example, has set itself the target of boosting investment in funds that meet certain ESG (environmental, social, governance) standards from 3% to 10% of its $1.3 trillion of holdings.
China and India have also thrown their weight behind the agenda by launching their first green bonds in 2015, while France has gone even further to become the first ever country to introduce mandatory environmental reporting.
But while the green market is poised to play a pivotal role in investment portfolios, and indeed the global drive to tackle climate change – it also brings with it several growing challenges.
France’s decision for mandatory reporting is expected to have far-reaching implications for issuers and investors alike. For example, any investor that wants exposure to the French market must now disclose how they evaluate green performance and integrate ESG factors into their investment policies.
Perhaps the most pertinent challenge with that is that there is a yet-to-be-determined global definition, standard or framework for identifying what qualifies as a ‘green’ financial product or initiative. In this context, screening and reporting becomes notoriously complex and non-binary – and this has consequently led to many varied interpretations for ‘green’.
For wealth managers whose clients seek green exposure, the next step is far from simple. From an advice perspective, firms face a huge task of bringing all of their relationship managers up to speed on this topic. Concepts and terminology are complex, as is the range of possible solutions.
Then there’s the added challenge of evaluating how best to offer and incorporate such funds into clients’ longer term investment goals, as well as understand/explain the risk-return profiles of these investments, and the financial-social return trade-off inherent in these strategies.
To improve transparency, understanding and ultimately accountability – assessment frameworks need to be established. Third-party verifiers have emerged to help both investors and issuers monitor, rate and report on performance but these must go beyond conventional bond analysis and act as an educational tool too.
Profound changes are driving the way businesses, consumers and investors approach sustainable investing and point to a future in which positive financial returns and societal outcomes do not have to be mutually exclusive.
News from the world of wealth:
FCA finds serious failings in pension advice market – FT Adviser
Thought of the week:
“Someone is sitting in the shade today because someone planted a tree a long time ago.” — Warren Buffet, Bloomberg
Author: Casey Nicholas
Background: Prior to joining Scorpio, Casey completed two placements in Malaysia where she gained deep industry knowledge and developed a passion for wealth management marketing. Whilst at university she was actively involved in the running of the Student Action for Refugees Society, engaging in and organising weekly English classes
Education: Casey holds a Bachelor’s degree in Philosophy from the University of Nottingham, where she explored her keen interest in the study of metaphysics.
And at the weekends: Casey is usually keeping busy – playing netball, attending a boxing class, or learning Spanish. She is also working towards creating a breakfast blog highlighting London’s best brunch spots – perhaps also using it as a cheeky excuse for lots of Eggs Benedict tastings