Above all, eco-responsible investors want to know exactly what is happening to their money.
When it comes to transparency, green bonds occupy a special place in the world of sustainable investment. They are governed by specific principles (Green Bond Principles, GBP), a common standard established in 2014 by issuer members of the International Capital Markets Association (ICMA). Among other things, this standard stipulates that green bonds are securities whose capital must be used exclusively to finance or refinance eligible new or existing green projects.
AN ESTABLISHED REGULATORY FRAMEWORK
The Green Bond Principles are transparency and reporting guidelines that are applied voluntarily by issuers to help promote the integrity of this market. They provide a clear framework for the issuance of green bonds. The GBPs are based on four main principles: the use of proceeds; the project evaluation and selection process; the management of funds raised; and reporting.
Eligible green project categories cover, among others, renewable energies, energy efficiency, pollution prevention and control, sustainable management of living natural resources and soils, preservation of terrestrial and aquatic biodiversity, clean means of transport, sustainable management of water resources, adaptation to climate change, green buildings, as well as products, production technologies and processes suited to the circular economy.
With the intention of becoming a global benchmark, the European Commission has adopted the EU Green Bond Standard (EUGBS), establishing the first legal regulatory framework for this fast-growing asset class.
IMMENSE FINANCING NEEDS
The transformation needed to meet the climate objectives of the Paris Agreement will require very substantial investment over the coming decades. With this in mind, bonds are an essential asset class for financing projects of this scale, while offering investors a measurable return. Sustainable bonds thus offer investors an opportunity to directly finance specific projects that can help transform the economy.
The market for sustainable bonds, in the broadest sense of the term, which covers not only green bonds, but also social bonds (which seek to combat poverty or encourage the construction of social housing) and sustainable bonds (which take into account both environmental and social objectives), is growing at a phenomenal rate. The volume of current issues has increased fivefold between 2000 and 2023 (from 250 billion to around 1,400 billion euros)1. Green bonds account for almost three-quarters of this market.
Investors are delighted by this development. The growing number of issuers not only improves diversification possibilities, but also market liquidity. Added to this is the fact that sustainable bonds present a relatively lower credit risk. Indeed, since the market is dominated by parastatal institutions and non-cyclical companies, they boast solid ratings and a defensive profile. But, as with this asset class as a whole, in-depth analysis is essential in the selection process, particularly to assess the risks of capital loss, interest rate and credit risks.
AN INNOVATIVE MANAGEMENT APPROACH
While asset managers are increasingly focusing on mature bond funds for traditional bonds, this is not yet the case for green and sustainable bonds. While asset managers are increasingly focusing on mature bond funds for traditional bonds, this is not yet the case for green and sustainable bonds. But a broadening issuer base and growing issuance activity could change that.
As a result, investors can pursue several objectives at the same time. In addition to the diversification provided by traditional investment funds and active security selection based on credit risk analysis, mature bond funds offer the characteristic advantages of individual bonds: security volatility and default risk decrease with residual maturity. Maturity bond funds therefore offer investors greater visibility of the expected target return.
What’s more, by displaying a target, mature bonds offer a high degree of transparency, and are required to publish detailed documentation on the use of invested funds. Investors can then consult the reporting documents to find out how their money has been used.
Sustainable investment is on a roll, as evidenced by the ever-growing number of investors looking for solutions that not only generate a potential return, but also support projects with a concrete and lasting impact on the environment.
1 Source: Bloomberg Global Aggregate EUR Green Social Sustainability Bond Index, data as of 12/08/2023
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Source: Allnews| 6 sep 2023 | Eugen Biller, ODDO BHF AM
Eugen Biller, Analyst-Manager, Euro Aggregate/Credit Investment Grade
Eugen Biller has been managing analyst, Euro Aggregate/Credit Investment Grade at ODDO BHF Asset Management since 2016. He holds an MA in Money Banking & Finance from the University of St Andrews and a degree in Philosophy and Economics from the University of Bayreuth.
ODDO BHF is a Franco-German financial group with over 170 years of history. It grew out of a French family bank and a German bank specializing in SMEs. With 2,500 employees, including 1,300 in Germany and Switzerland and 1,200 in France and Tunisia, and over 140 billion in customer assets, ODDO BHF has three core businesses: private banking, asset management and corporate and investment banking.