Our views

Green bonds

Gail Counihan, Sustainable Investment Analyst and Martin Foden, Head of Credit Research

6 October 2017

Fundamentally, we are hugely supportive of any capital flowing towards low-carbon and climate-resilient solutions. It follows that we are also hugely supportive of any market mechanism that facilitates and increases this capital, either by raising awareness or by connecting borrowers with lenders. 

Debt markets continue to be the primary mechanism whereby projects focused on transitioning us to a lower-carbon future can access capital; be it through renewable energy, increasing efficiency or building sustainable water infrastructure. Almost $300 billion of debt has been issued under the “green bond” label since 2007.  Whether this lending would have occurred without the label of green bond is difficult to say, but there is a strong possibility that it would not have - as the buyers of green bonds almost always have an environmentally focused agenda. Green bonds as a market mechanism are very efficient at allowing debt issuers to actively seek out these specialist buyers.

As with most project finance, there exists a great deal of variation in the type of projects that are financed, or refinanced. An eligible green bond project must provide “clear environmental benefits” which must be assessed and quantified by a third party, at a cost to the issuer. There can be varying levels of green – indeed, some opinion providers refer to dark and light green bonds. 

RLAM takes a unique approach to investing in green bonds. As lenders in the capital markets, we build our own holistic understanding of the asset, our security as lenders, the cashflows, the underlying asset and its environmental impact. This holds true for all bonds that we appraise as prospective investments, but is especially important for green bonds.

In our experience, green bond issuances are frequently oversubscribed and relatively expensive. The volume of market participants with an environmentally focused agenda generates outsized demand for third party designated green assets, allowing them to fill a specified allocation within portfolios to “green” investments. This results in aggressive pricing of the asset class, and often does not represent good value for bondholders. In these instances, we will typically choose not to buy a green bond for our clients’ portfolios, despite our temptation to support green initiatives. In cases where green bonds provide equal (or better) returns to an equivalent non-green asset, we will of course allocate our money to the green option.

Although we think that certain bonds labelled as green bonds do not represent appropriate risk-adjusted return for our clients’ portfolios, we do choose to finance many bond issuers which have environmentally favourable or low-carbon strategies, but are not formally classified as a green bond. For example, we have invested in Innogy, a European utility at the forefront of the energy transition. They have recently taken over operation of EV charging infrastructure in over 100 locations across Germany to add to their large existing network.

Financing these sustainable projects and operations that are not formally classified as “green” often represents better risk-adjusted returns for our clients, while still contributing to the lower-carbon economy or other environmental initiatives. It is our view that this is a sensible way to help our clients finance the transition to a lower-carbon future without sacrificing returns.

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.