In Focus: Megatrends  

Green bonds are 'gold dust' for investors

Green bonds are 'gold dust' for investors
Photo: Nataliya Vaitkevich via Pexels

Demand for green bonds has risen exponentially, outstripping supply and pushing up prices for bonds trading on the secondary market, research has shown.

According to the latest Green Bond Pricing in the Primary Market report, demand for green debt has been soaring since market inception, with over $1.6tn (£746bn) issued to date and 2022 touted to see the first yearly trillion.

Likewise, pricing advantages are expected to show endurance during a changing economic landscape, driven largely by this heavy demand outstripping the supply as asset managers look to address climate risk in their portfolios, the report stated.

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Sean Kidney, chief executive of Climate Bonds, said: “The demand for green bonds is defiantly withstanding the economic, social and geopolitical turmoil over the last couple of years.

"The ability to weather storms and survive downturns is absolute gold dust and promises value across primary and secondary markets.”

The 26-page report also suggested the pricing benefits of green bonds were "pervasive", and explained the concept of ‘greenium’ in the discourse of sustainable finance.

The greenium - the 'Green Premium' - represents a great result for issuers as it means they pay less to finance their green bonds compared to vanilla equivalents.

But investors also benefit, according to the research, as the slightly higher premium paid by the investor on green debt can be justified by the strength of the secondary market performance of green bonds when compared to vanilla equivalents.

This means investors have to date been able to expect a good price when selling on the secondary market. 

The report examined 73 green bonds with a combined face value of $71.8bn (£54.29bn). It found that pricing benefits have remained visible as the market expanded to over $0.5trn (£0.37trn) in issuance in 2021 and $1.6trn since market inception in 2007, based on the Climate Bonds Green Bond Database.

However not all market commentators are enthralled by green bonds - either by demand for them or the rates offered to investors.

For example, Agne Stengeryte, rates strategist at the Bank of America MLI UK, said inflows to the UK government-backed National Savings and Investments' green bond have been 'marginal'.

In the latest European rates watch from the company, analysts commented: "With regards to NS&I, the latest flows are positive but remain marginal, with a £0.1bn inflow in January 2022 followed by £1bn in February 2022."

For the fiscal year to February, NS&I adds up to around £3.7bn, which is still less than the £6bn which had been pencilled into the Debt Management Office's estimates for the fiscal year, according to UK public sector finance data.

Stengeryte added: "Despite the recent doubling of the interest rate the NS&I pays on its Green Savings Bond to 1.3 per cent from 0.65 per cent at launch, the three-year fixed rate remains relatively low and we do not expect major gyrations in NS&I monthly flows for the time being."