Top Three Green Bond Myths
- 15 March 2024 (5 min read)
Despite the breadth and depth that the green bond market now offers, there are still a few hardwired misconceptions about the asset class. In this piece we want to share with you our thoughts on these myths.
Myth 1: Green Bonds offer lower yields than conventional bonds
Green bonds function as conventional bonds and their yield is influenced by various factors such as market conditions and the credit fundamentals of the issuer. Importantly, the environmental projects financed by green bonds do not directly impact the risk or performance of the issuer.
As the chart shows, green bonds currently offer attractive yields, and have outperformed the conventional universe in 5 out of the last 7 calendar years.
Calendar performance
Source: AXA IM, Bloomberg as of 29 February 2024
For investors, green bonds currently offers attractive yields while also having access to issuers who are investing in the transition to a low carbon economy. Furthermore, the observed evolution of the "Greenium," (the yield differential between Green Bonds and conventional bonds) has diminished and is currently approaching parity. As of 29th February 2024, the greenium was, on average, around 2bps in the EUR Green Bond Market.
Myth 2: Green Bonds are for niche investors
While this may have been more accurate during the nascent stages of the market a decade ago, it is now an outdated assumption. The green bond market has experienced exceptional growth in recent years, characterised by an expanding issuer base and enhanced liquidity which has resulted in greater sector and regional diversification. The green bond universe has also seen increasing diversification in the credit portion of the market, as well as the growing share of sovereigns.
This evolution, coupled with growing awareness of the necessity to transition to a low-carbon economy, presents attractive investment opportunities, and helps position green bonds as a credible component of the global allocation for the majority of investors.
Myth 3: Green Bond market is relatively small
The green bond market has undergone extraordinary expansion in the last decade with a growing number of issuers from the corporate, governmental, and institutional sectors. As the chart shows, even in the challenging market conditions of 2023, issuances of green bonds hit record highs at $422bn of issuances1 . This trend has continued into 2024 and it now stands at $1.62 trillion with more than 740 issuers2 . This growth has facilitated the creation of diverse investment solutions ranging from global to short duration, as well as total return strategies and offers similar alpha sources to the broader global universe.
Volume of green bond issuances per year (in USD bn)
Source: AXA IM, Bloomberg as of 29th February 2024
We have seen a clear shift in interest from more “conventional” investors during the past few years. We expect this interest to continue as investors look to increase their contribution to positive environmental impacts while aiming to have exposure to a rapidly growing market, with high diversification and increasing liquidity.
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