Swedish Green Bonds Pandenomics

    Stockholm (NordSIP) – As the Swedish government issued its first green bond, CICERO Shades of Green, the Norwegian-based second opinion provider for green bond frameworks, joined forces with Pareto Asset Management to assess the Swedish green bond market’s reaction to the COVID-19-led market crisis in March 2020 and draw lessons for the future.

    In Sweden, green bonds represent today approximately 20% of the corporate bond market and both institutional investors’ appetite as well as strong government support bode well for the segment’s growth.

    The report’s main conclusions are that, even though Swedish green bonds behaved primarily like conventional fixed income securities, they displayed attractive features for portfolio managers in this crisis. The bid-ask spread widening, a typical down-market reaction which makes it more unattractive to trade bonds, was short-lived. Selling pressure was lower than for regular bonds, which limited the securities’ drop in price. The primary market also saw little disruption.

    “We have seen that green bonds have had interesting trading patterns in these stressed markets. An ESG integrated business model is an indication of a well-run company and in times of high uncertainty, this gives investors additional comfort. From a demand perspective, there is a broad range of investors that want to increase their exposure to green bonds which also creates a natural demand,” says Gustaf Tegell, fund manager Pareto Nordic Cross Credit.

    Green bond issuers benefit from a range of tangible benefits, the report reminds us. Beyond the often cited reputational and transparency benefits, the authors have identified a slight ‘greenium’ in the Swedish market. This means that issuers pay a slightly lower yield compared to comparable traditional bonds. This yield premium is also reflected in the secondary market, according to an analysis by Kristin A. Ø. Sjøstedt and Sofie Parow.

    “Overall, the growing dynamic in the Swedish green bonds should offer more and more idiosyncratic alternatives for portfolio managers to further shelter their portfolio against external shocks (as seen with the Covid-19 episode) as well as transition / physical risks due to the climate change,” the report concludes.


    Photographic credits @9_fingers_ on Twenty20

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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