Talking Heads – Have green bonds emerged from their niche?

Talking Heads with Arnaud-Guilhem Lamy

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 bonds. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Arnaud-Guilhem Lamy, Head of Euro Aggregate and SRI Fixed Income. Welcome, Arnaud-Guilhem, and thanks for joining me.

Arnaud-Guilhem Lamy: Thanks for inviting me, Daniel. It’s a pleasure to be here.

DM: Let’s start with the basics if that’s OK for listeners who aren’t quite so familiar with what green bonds are. So, give us an explanation and as tell us why green bonds matter.

AGL: As a reminder, a green bond will fund green projects. It’s a bond with exactly the same risks [and] credit characteristics as a standard bond from the same issuer with the same maturity, except that it only funds green projects such as renewable energy, clean transportation, green buildings. Why do they matter? Because as you’ve all experienced, climate change is a reality that we have to mitigate, and so funding these green projects is a good way to help fight climate change.

There’s often a debate on the additionality of these green bonds. Wouldn’t these projects have been funded anyway? That’s a fair question. But when you invest in green bonds, at least you know you’re funding only green projects and not projects that will damage the planet. Secondly, we have had an interesting study by the Bank of International Settlements. They’ve compared the carbon emissions of issuers of green bonds and non-issuers of green bonds. What they saw is that there’s a big difference between the two. Green bond issuers have a lower carbon footprint.

More interesting from my point of view was the evolution of the carbon emissions and carbon intensity of these companies before and after they issued their first green bond. Before the issuance, the corporates were not looking that much at their carbon footprint. After the green bond, we see that on average there is a decrease of carbon emissions of something like 10% after four years. This is even more impressive when we look at the intensity of emissions. After the green bond, the carbon intensity after four years has fallen dramatically. So, the inaugural issuance of a green bond is a good indicator of the future positive behaviour of the company from a carbon footprint standpoint.

DM: Green bonds are a relatively new asset class. There’s a lot of developments and advancements. So, share with us what’s new? Are you seeing growing standardisation? What might be on the horizon?

AGL: In terms of primary issuance, it has been strong [at] around beyond 500 billion euro per year. With few redemptions, it has led the market to grow quickly. We now have something like 2.3 trillion euro of green bonds which are available. If you go into the details and look at the euro investment-grade issuance, you will see the market share in 2024 of green bonds was around 15%. One out of six bonds issued were green bonds. So, it’s not a niche market anymore.

We have seen a broadening in terms of sectors, with more issues coming from the consumer cyclical sectors or from industrial sectors. Overall, a steady market in terms of developments.

On standardisation, we have seen a big change with the European Union Green Bond Standard. This  is a voluntary standard to improve the transparency of green bond markets within the EU. There are several criteria. The main one is the alignment of the [green] projects with the European Union taxonomy. The requirement is to provide an allocation report, an impact report. We expect this to help [with] the standardisation of the green bond market and the quality as well.

DM: Investor expectations have evolved – always wanting to think about performance at the same time as achieving the green bond objective. What do investors have to expect when it comes to performance? Do they need to anticipate giving up performance relative to generic fixed income products?

AGL: Firstly, we don’t think the greenium is material. To remind everyone, the greenium is defined as the difference in yield between a green bond and a [regular] bond from the same issuer with the same maturity. So, when you buy a green bond versus a standard bond of same issuer or [the] same maturity, you’re not losing on this part.

Secondly, the question is not on a bond-by-bond basis, but on the universe basis. If you invest in the green bond universe versus investing into a euro aggregate universe or global aggregate universe, what would be the differences? More than three years ago, there was quite a difference in terms of modified duration. This difference does not exist anymore. Obviously, there are still some differences. The global green universe is still skewed towards more euro-denominated bonds and less USD-denominated bonds, and you have no Japanese government bonds in a global green bond index.

Having said that, the recent evolution of the performance of the three indices has been pretty close. For instance, if we take the three-year performance, as of 24 June 2025, the cumulative performances of the Bloomberg MSCI Global index has been 4.73% versus 4.82% for the Bloomberg Euro Aggregate benchmark and 4.49% for the Bloomberg Global [Agg}. Obviously, past performance is not a guide to future performance. For green bonds, I would expect a performance not far from the euro fixed income investment-grade market. My conclusion would be a question for you, and for fixed income investors as a whole, what is still refraining you from investing into green bonds at a broader scale?

DM: Very good question for our investors. If I can summarise some of the key points that you shared with us, you talked about how green bonds are not fundamentally different from other corporate bonds. When we think about the use of funds, they are primarily targeted towards the effects of climate change. You highlighted that it is no longer a niche asset class with 2.3 trillion in market value, and you’re seeing more issuers from different industries over time. Finally, you don’t see a significant difference in the yield or the total return between green bond indices and the standard euro. Well, Arnaud-Guilhem, thank you very much for joining me.

AGL: Thank you, Daniel, it’s been a pleasure.

DM: That’s it for this week’s episode of Talking Heads. If you would like more information about our capabilities in green bonds, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas-am.com. Just before we go, I’d like to mention that the Talking Heads podcast is available on Spotify and on YouTube. For YouTube, visit youtube.com/BNPP AM slash playlist and tap or click on Talking Heads. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Daniel Morris, and Arnaud-Guilhem Lamy, head of Euro Aggregate and SRI fixed income. Please do join me next week. Until then, take care.