Talking Heads – Green and social bonds: a fully grown market

This is an audio transcript of the Talking Heads podcast episode Green and social bonds: a fully grown market

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing green and social bond strategies. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Arnaud Guilhem Lamy, Portfolio Manager. Welcome, Arnaud-Guillem, and thanks for joining me.

Arnaud-Guilhem: Thanks, Daniel, for having me today.

DM: We’re going to be talking specifically about green and social bonds and you can perhaps help us differentiate them from more traditional bonds. Green and social bonds is still a fairly new market. What have you seen as the main developments over the years? And what do you see as the principal challenges today?

AGL: So, starting in 2017, the main challenge was really concentration, in terms of sectors and maturities. At that time, it was mainly agencies, supranational and utilities, and mainly long-term bonds. That has completely changed now. And we have every sector now involved with other industrials, utilities, financials, governments, agencies. You can find green bonds in all these different sectors. And in terms of maturities, if you look [at] the German government green bond [sector], which has two-year, five-year tenures [and] 30 years. So, you can have green bonds across the curve. So that’s something which is very important for the development of the green bond  and  social bond market. I it’s very important when you want to have an active management and an allocation to green bonds in your portfolios. Keep in mind that the current green bond market is  sizable  more than USD 2 trillion We think this market should grow further. Indeed, when you look at what’s required to support the transition towards [a] low carbon economy by 2030, it’s around [USD] 6 to 7 trillion of funding per year. So, there’s plenty of space to grow for the green bond market. And we expect green bond primary issuance to be around [USD] 500 billion per year. We now have a liquid market with bonds that have similar liquidity than the standard bond. One thing which is very interesting in addition: almost one in five investment-grade euro corporate bonds being issued this year and last year either was green, social or sustainable. So definitely not a niche market. I think it’s very interesting for investors to switch from an allocations that was potentially small to green bonds into a core allocation.

DM: Those figures will surprise a lot of our listeners to the degree the market has developed. If we go back to the question of how they compare versus traditional bonds, one of the things people talk about is a premium that is the price one it has to pay for a bond’s greenness. Is there really such a price for greenness in these bonds?

AGL: I would say that the greenium is some kind of urban legend. You might have a 0 to 7 basis points difference between the yield of a standard bond and the yield of a green bond with the same issuer [and the] same maturity. So, it remains very limited. I think  it’s not really something that anyone should hide behind when talking about performance of green bonds.

DM: You mentioned how the market is now over USD 2 trillion, that’s certainly substantial. If we compare that, though, to traditional bond markets,  it’s probably still relatively small. Nonetheless, can investors expect a green investment strategy to behave like a traditional bond solution?

AGL: I’m happy you asked the question, because if we look back at performance 2022 was a challenging year for the whole fixed income market, but especially for the green bond index, which lagged the traditional market. If you look at the performance from the end of 2022 to the end of Q3 2024, it’s interesting to note that performances were very similar for the Bloomberg MSCI Green Bond index hedged back into euros, it was 10.37% as of end of September. For the Bloomberg Euro aggregate bond index, it was 10.45[%]. So, from the end of 2022 to end of September 2024, you have just an eight-basis point difference between these two indices. You have a very similar type of risk/return. I strongly believe that investors with a medium to long-term horizon should include thematic green bonds into their allocation. You would really have an impactful portfolio with positive outcomes for, for the planet.

DM: I want to pick up on that point. Can you give us some examples of the impact that these investments can have?

AGL: So, we provide an impact report every year, and when we look at what we’ve done, we’ve invested in projects that have avoided more than 540000 tonnes of CO2 emissions related to the production of electricity. We have funded a project which have allowed more than 80 000m² of green buildings to be renovated or built That’s really something where you will have a real impact. You help funding renewable electricity and energy savings. To be included in our green bond investment universe,  every green one must meet our criteria related to the green ambitions, the integrity of the project, and how the proceeds are used. And we also look at the long-term commitment to finance sustainable activities. We, for instance, [were] funding a transition from diesel trains to electric trains. At the same time, you have to look at how electricity is produced and see if it is through coal powered plants. That’s why we need our ESG analyst to check everything to be sure that the outcomes of these projects are positive for the planet. I would strongly invite all the investors toto download our impact report. You can have it from our website. We really believe that green bond strategies can provide investors with an effective opportunity to support green projects. It can be a core investment in classic portfolios.