Green bonds (Credits: Adobe Stock)
Par Ronald Van Steenweghen, Fixed Income Fund Manager chez DPAM
The green bond market is expected to have a record year in 2024, with forecast issuance levels exceeding previous expectations. The stagnation in growth rates observed since 2022 is largely attributable to a high interest rate environment, rather than a weakening commitment to climate initiatives. As significant investments are required to address global climate challenges, there are ample opportunities for growth in this market segment.
The “green bond” label maintains its reputation as a high-quality asset class among investors and issuers. Recently, issuers from high-carbon sectors with significant green capital expenditures have increasingly favored green bonds over sustainability-linked bonds, which are typically tied to sustainability-based metrics. behavior.
High transparency, proactive investor engagement and alignment on credible actions towards net zero appear key to overcoming investor skepticism. Furthermore, while renewable energy and sustainable buildings remain the main categories of product use, we are seeing a new allocation of capital towards sustainable water and biodiversity management projects, which further diversifies investments in green bonds.
Europe remains the dominant force in the global green bond market, driven by large European issuers such as the European Union (EU), the European Investment Bank (EIB) and KfW (Kreditanstalt für Wiederaufbau). New entrants to the corporate world and increased cash issuance promise to increase market diversity, thereby attracting greater investor participation and potentially amplifying market resilience.
Finally, “greenium” – the premium that investors pay for green bonds over comparable conventional bonds – has almost disappeared globally, suggesting that green bonds can be further integrated into traditional fixed income portfolios.
The impact of new European regulations on the development of the green bond market in Europe
Despite strong regulatory pressure to advance sustainable finance, major practical challenges persist. Recent initiatives, such as the European Green Bond Standard (EU GBS) and the ESMA Fund Designation Guidelines, which incorporate PAB exclusion criteria without exception for green bond issuers, raise questions about their ability to channel significant capital into low-carbon investments. Notably, financing the transition remains a neglected area in many of these new regulations.
Inconsistent regulatory standards threaten to fragment the green bond market, potentially intensifying “ESG fatigue” and weakening investor interest in financing a low-carbon economy. Putting in place consistent and inclusive regulations will be essential to maintain the momentum of sustainable finance.
The green bond approach in our investment strategy
For more than five years, we have used a proprietary methodology to rigorously evaluate green bonds. Our ESG team ensures that each bond complies with international standards, has a second-party opinion and demonstrates a commitment to transparent allocation and impact report. Additionally, we conduct a qualitative assessment of each issuer’s climate strategy and goals, noting inconsistencies between stated goals and financing practices as potential areas of concern. Our analysis is based on three fundamental principles:
-
L’importance relative :
this principle ensures that projects are closely linked to the issuer’s main risks and opportunities and are relevant to its overall strategy. -
Intentionality:
Issuers must set ambitious and clearly defined environmental objectives, with projects that comply with current international standards. -
Additionality:
projects must have an impact on the environment beyond standard operations. This principle evaluates factors such as refinancing proportions, drawback periods and capital expenditure commitments.
Only green bonds meeting our internal assessment criteria are included in our list of validated instruments, ensuring that they comply with international standards and our commitment to meaningful impact.
