Opinion: Greening the Bond Markets

At the beginning of April, NN Investment Partners launched the NN(L) Sovereign Green Bond fund, the fist sovereign bond fund with the aim to make positive environmental impact through projects. The range offers investors flexibility to allocate green bonds that replicate the characteristics of traditional bonds. This kicked off the rise in typical fixed income investor demand for green bond allocation, outside of just impact investors. Global green bond issuance this year could increase by 50% to €400bn, putting the total market above €1tn and with expectations to double in size by end of 2023.  The ECB’s next strategy will include two sets of sustainability measures, a protective approach to shelter their balance sheet from climate-related risks and a proactive approach that halts the sale of bonds of heavy emitting industries and underweights issuers with higher climate risks. The market expects the premium on sustainable debt to be outstripped by demand outstripping supply, especially in the +20-year sector where scarcity of sustainable duration makes those issues more expensive. Fund manager challenges include dealing with smaller, private high-yield issuers on ESG and differences in engagement between sovereigns in developed and emerging markets.