Developing Green Bond Safety and Returns

    Stockholm (NordSIP) – “We need to fight climate change everywhere,” insists Alban de Fay, Head of Amundi’s Fixed income SRI and Green Bond strategies. Green bonds have galvanized the fixed income market to respond to the rising demand for climate-friendly products that direct funding to projects addressing the biggest threat we face.

    The market for green bonds has been showing signs of rapid development and maturity recently, ten years after the World Bank issued the first green bond. “The green bond market has reached a very nice stage, as we currently have several types of issuers issuing green bonds,” de Fay tells Ekonamik during his trip to Stockholm. Supranationals, corporates, public sector entities such as sovereigns, regional and local government agencies have all been issuing green bonds. “All sectors can and do issue green bonds, so we are very confident with the development of the green bond market.”

    The progress and evolution of the green bond market have yet to produce a wide-ranging impact in the fight against climate change. “We have to admit that currently the green bond market is mainly focused on big infrastructure such as renewable power plants, onshore and offshore wind farms,” acknowledges de Fay. “We need to help the market develop in other segments as well,” he continues. Amundi, Europe’s largest asset manager, has embarked on several initiatives to address the gap.

    The Emerging Green One Fund, and Amundi’s Newest Initiative

    “Last year we launched a fund with IFC, a subsidiary of the World Bank, to develop green bond markets in emerging countries,” says de Fay. “The idea was to launch an initiative to help the green bond market develop everywhere.” Amundi’s Emerging Green One (EGO) fund, which aims to deploy over US$2 billion to climate-related projects in emerging markets over seven years, was fully invested in emerging market bonds on day one and is gradually swapping those positions into green bonds. One of the attractive features of this fund is that it offers additional risk protection with junior tranches that will absorb potential losses before senior investors, in case of default.

    According to a recently published report related to the project launched with IFC, around 16.5% of the portfolio has already been allocated to green bonds. “We are quite happy with this project because we are advancing in our goal in terms of share of green bonds of the portfolio and we are happy with the performance as well,” says de Fay. “The development of green bond markets in emerging countries is a bit more rapid than we expected.”

    Amundi has also embarked on a new project in an attempt to develop new green bond markets in Europe. “We are currently working on a new initiative with major European investors dedicated to investing in green bonds issued by high-yield issuers and private companies through private debt,” Alban de Fay tells Ekonamik. The reason for this project is twofold. “One of the main ideas behind this project is to develop the green bond market with new kinds of projects that finance smaller renewable power plants, innovations such as electric vehicles or more efficient housing to reduce energy emissions.”

    Since green bond markets do not offer returns beyond what their vanilla counterparts do, “the second reason behind the project is to create a green product with a higher yield,” argues de Fay. Hence the decision to target high-yield issuers. “Some investors are happy to invest in green bonds, but currently green bond markets do not offer attractive yields. We aim to attract new investors with this project,” he adds. Amundi will set up a closed-end fund with a progressive deployment to ensure that the fund is fully invested in green bonds. This new initiative serves as an extra push to ensure the robust growth of the green bond market.

    Green Premium and Upcoming EU Legislation

    Green bonds will continue to be essential in the process of raising awareness for climate change and the projects these bonds support, but Alban de Fay argues that investors should not forgo any return by paying up for green bonds to encourage ethical spending. “Regarding the green premium, we consider that green bonds have to be issued to the same price as other bonds from the same issuer,” argues de Fay. “We are happy to invest in green bonds, but not at any price,” he continues. “Our clients share the same ides, they are happy to invest, but they do not want to pay the cost of the energy transition.”

    The European Commission is in the process of coming up with an EU Green Bond Standard that would clarify the definition of a green bond. Alban de Fay reckons that “the lack of a clear definition of what is green and what is not green could be the break of the development of the green bond market.” Yet, he acknowledges that “too much standardization could reduce the potential of the green bond market.”

    “If we could bring more standardization, more clients would know what a green bond is, which could help accelerate the development of the market. However, investors should have some leeway to judge if a green bond is green enough or not.” Alban de Fay argues that “if we are too stringent” with the standardization, current and potential issuers could face an additional constraint in the issuance of green bonds. “We have to keep in mind that too much standardization could be a break for the development of the market,” he concludes.

    Picture © NordSIP

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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