The Green Bond Principles define a green bond as any debt instrument whose funds are meant to finance or refinance ‘green’ projects, that is, projects with the ultimate goal of combating climate change or mitigating its impact.
Climate change is one of the biggest challenges of our time, and we believe green bonds are one of the best ways to finance activities with low greenhouse gas emissions, thus supporting the development of a low-carbon economy that takes climate change into account.
In recent years, the green bond market has exploded, from EUR 30 billion in 2013 to more than EUR 300 billion by year-end worldwide, according to BNP Paribas Asset Management estimates. Rapid expansion in this market has resulted in greater issuer diversification and issue numbers, as well as enhanced liquidity – two features essential in defining an investment solution in its own right.
Green bond market in Q1 2018: proceeds mainly go to transport, wind and solar
Source: Climate Bonds Initiative, preliminary figures for Q1 2018
Green bonds versus traditional bonds
Green bonds are just as attractive for insurance companies as traditional bonds. BNP Paribas Asset Management’s research has found that they are no more expensive than conventional bonds on the primary market and there is no appreciable difference in volatility-adjusted yields (i.e. their Sharpe ratios).
So buying a green bond is just another way of investing in the bond market. However, in addition to boosting portfolio returns, green bounds also generate environmental and ecological benefits. Another advantage of green bonds is that they can help meet legal or regulatory obligations, such as the ones contained in Article 173 of the French energy transition law, by allowing investors to offset CO2 emissions with other products in their portfolios.
An innovative approach is key
BNP Paribas Asset Management’s research team has developed a proprietary analysis methodology specifically for green bonds. This methodology integrates a phase of in-depth financial and extra-financial analysis to identify green bonds in a universe of almost 150 issues, amounting to about USD 115 billion in outstanding bonds.
An innovative process ensures that these investments have a concrete positive impact in combating climate change by checking both when they are issued and one year afterwards whether the issuer has met its commitments.
This article was published on 10 June in Tribune de l’assurance.