Green bonds: Assessing the impact

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For investors in green bonds, Atlanticomnium’s Romain Miginiac suggests that sustainability strategies of issuers are key when it comes to generating positive environmental impacts.

19 November 2021

Generating a positive environmental impact and contributing to climate change mitigation are primary objectives for investors in green bonds. In terms of impact, it is therefore vital to consider whether there is an environmental benefit by buying a green bond compared to not buying it. Arguably, once a green bond has been issued, projects have been financed and therefore the impact is gone. However, we believe there is greater impact in holding the bond rather than just buying the bond. For example, the impact of a bond related to a solar farm project is to avoid a certain number of tons of CO2 per annum compared to a baseline, but this happens as the solar farm is operated over time, not on day one. In our view, impact can be seen as a coupon on a bond that accrues over time. Each day the bond is held the underlying project generates a number of megawatt hours of electricity and helps avoid a certain amount of CO2. Ultimately, it is the holding period that creates an impact, not buying at issuance or on the secondary market.

Projects and issuers

In situations involving projects already in existence before the issuance of a green bond, it could be argued that the bond has no incremental impact. At a time where the need and demand for climate financing is increasing, it is fair to expect issuers to finance either new projects or refinance existing projects issued very recently for an incremental impact. For example, for a bank that plans to aggressively increase green financing – whether it issues bonds in 2020 to finance projects in 2021 or finance projects in 2021 and then issue green bonds in 2022 – the situation is similar. However, if a bank uses the proceeds for projects from 20 years ago, that is problematic. Also, most investors are asking for ‘new’ projects, but also to have a rapid timeline to allocate the proceeds of green bonds. This seems like a headache for issuers and a reasonable situation to tolerate refinancing.

Perhaps more importantly, the sustainability strategy of an issuer (particularly its environmental strategy) should be a key consideration. The incremental impact also comes from the evolution of the overall portfolio of green projects of the issuer. Therefore, by buying green bonds from issuers with a credible and ambitious environmental strategy, investors benefit from that incremental impact. This is paramount as many issuers adopt a portfolio approach for their green bonds, meaning that they do not allocate projects specifically to green bonds, but rather maintain a stock of green assets in excess of green bonds outstanding. For example, BBVA has increased its eligible asset portfolio from EUR 1.1 billion in 2018 to EUR 4 billion in 2020, reflecting an ambitious strategy that includes EUR 200 billion of sustainable financing and facilitation by the end of 2025. Green bonds are therefore a natural tool to fund the bank’s financing pipeline. Chart 1 shows BBVA’s pool of green assets has grown in line with green bonds issued, with investors benefiting from the incremental impact of a growing pool of green assets. Provided issuers grow their stock of new green projects, the incremental impact of green bonds is clear.

Chart 1: BBVA has expanded its green assets in line with green bonds issued (EUR million)

  
Source: BBVA as of December 2020. Past performance is not a reliable indicator of future results or current or future trends. For illustrative purposes only.

It is worth noting that the concept of financing and refinancing will become less relevant over the coming decades. As climate financing accelerates and the critical mass of projects required aligns with Paris Agreement targets, green bonds will mostly exist to refinance existing assets being operated. Their impact will gradually lower as global CO2 emissions decline. For example, operating a solar plant in a country where energy supply is 100% green is saving nothing compared to the baseline, unless using a more efficient technology. Such a scenario would, in any case, be a nice problem to have and an interesting one to debate.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.

Romain Miginiac

Fund Manager & Head of Research at Atlanticomnium S.A.

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