Green bonds are the most popular sustainable fixed income instruments among institutional investors, according to a freshly released survey by NN Investment Partners.
The asset manager carried out a poll among investors, which found that 45 percent believed they made the the greatest positive impact. This was followed by sustainability linked bonds (37 percent), social bonds (11 percent) and transition bonds (7 percent).
The findings also revealed that the greatest barrier to green bond investing is the perception of inferior investment returns, this outlook was shared 44 percent of respondents. Additional barriers cited in the data included fear of greenwashing (38 percent) and insufficient market capacity (19 percent).
Meanwhile, more than three in five respondents (63 percent) say they would use green bonds as an ‘impact bucket’ separate from their traditional bond allocation, whereas 20% would use them to replace corporate bonds and 17 percent to replace government bonds.
Commenting on the results, Bram Bos, lead portfolio manager green nonds, NN Investment Partners, said: “It is no surprise that green bonds are clearly the most popular sustainable fixed income instruments because they constitute the most mature and liquid market. They are probably the most effective way for fixed income investors to enhance the impact they make without sacrificing returns. At times, yields might be a little bit lower but over the last seven years, on average a euro-denominated green bond portfolio has generated 40 basis points more than a regular bond portfolio, and for corporate bonds, the difference is 60 basis points.”
Although there are several passive alternatives available in the market, NN IP believes there are two key reasons that investors should favour active investing in green bonds.
Douglas Farquhar, client portfolio manager green bonds, NN Investment Partners, explained: “As green bonds are self-labelled instruments, you need to do in-depth research that assesses both the green projects being financed and the issuers themselves to mitigate the risk of greenwashing. Second, green bond markets are not always efficient. Sentiment and supply/demand changes can influence valuations, while rating agencies may lag behind when it comes to reflecting changes in credit fundamentals. So active management and doing your own research are essential to identify value opportunities ahead of the market and avoiding greenwashing. A clear philosophy, a dedicated team and a solid track record are all important criteria for selecting a green bond manager.”