Green bonds should be considered as a viable replacement for regular bonds in a credit portfolio, as green bond indices generally performed better than traditional indices over the past four years, NN Investment Partners (NN IP) has said.
NN IP analysed how green bond indices performed compared to regular indices for euro green bonds and for euro corporate green bonds over the past four years and concluded that green bond markets deserve to be assessed in a broader bond market context.
It compared the performance of the Bloomberg Barclays MSCI Euro Green Bond index to an index of regular euro-denominated corporate and sovereign bonds (Bloomberg Barclays MSCI Euro Aggregate index), and found green bonds generated returns of 7.4 per cent compared to 6 per cent for regular bonds in 2019.
Euro green bonds outperformed for three of the four years, by an average of 0.70 per cent per year, although the annual volatility of the green bond index was higher for three of these years, meaning that the higher returns were largely the result of higher risk.
NN IP saw the duration of the Bloomberg Barclays MSCI Euro Green Bond index increase significantly in early 2017, at the time the Republic of France’s first green government bond was included in the index, and concluded that the higher duration means that green bonds are more sensitive to interest rate changes.
As interest rates continued to fall last year, the Bloomberg Barclays MSCI Euro Green Bond index outperformed the Bloomberg Barclays Euro Aggregate index over 2019, the analysis found.
Bram Bos, lead portfolio manager green bonds at NN IP, said: “The results of this analysis strengthen our belief that investing in green bonds is an easy way to invest in fixed income more sustainably without having to compromise on performance.”
NNIP compared the Bloomberg Barclays MSCI Euro Green Bond index: Corporate to the Bloomberg Barclays MSCI Euro Aggregate Corporate index, and found that in 2019, corporate green bonds booked returns of 6.4% compared to 6.2% for regular corporate bonds, and outperformed in three of the four years – 2016, 2018 and 2019.
The annual volatility was also higher for all four years, but in the case of corporate bonds this gap has become smaller each year, NN IP said.
It also compared the daily volatility of these two corporate bond indices over the past four years and found that, in terms of volatility, the green and non-green indices are moving towards each other, with NN IP citing the growth and increased diversification of the corporate green bond market.
The duration of the two indices is now almost equal.
Bos added: “The arguments are tipping in favour of corporate green bonds – not just as a way to create impact but also from a purely financial and risk-return perspective.”