lu_inside12-full

Inside magazine issue 12 | Part 03 - From a corporate perspective
So far, the supply of green
bonds is not matching the
massive demand, and green
bonds tend to be largely
oversubscribed.
Nevertheless, Bank of America Merrill
Lynch has pointed to the fact that the
green bonds listed in its index have proven
to have a lower credit risk rating and
that returns on these bonds show less
volatility as compared to their non-green
counterparts. 24
The OECD 25 lists a number of possible
investor incentives. In addition to the
fact that green bond investments fulfil
ESG (Economic and Social Governance)
requirements and mandates, the “green”
label holds bond issuers to more stringent
transparency standards in relation to their
use-of-proceeds reporting compared
to regular vanilla bonds, and this allows
investors to better assess their risk.
Another incentive the OECD cites is
portfolio diversification: particularly for
investors whose portfolio includes a strong
focus on carbon-intensive investments,
green bonds offer an opportunity to hedge
against risk.
Ulrik Ross, Global Head of Public Sector
and Sustainable Finance at HSBC,
suggests we think of the green investor
class as comprising different sub-classes
characterized by different “shades of
green.” First, there are the “dark green”
investors, which tend to be churches,
charity foundations, private banks or
asset managers serving clients who are
strongly committed to socially responsible
investing. Ross notes that this group has
always placed sustainability at the heart
of its investment strategy, but that doing
so has been facilitated by the green bond
market. A second group of investors have
delved into the sustainable investment
space more recently, and will use green
bonds to complement their existing
investments, as a strategy for diversifying
their portfolios in ways that meet their
stakeholders’ wishes regarding investing
in environmentally responsible causes.
Finally, we can find what Ross refers to as
an “opportunistic investor group”: a group
that will invest based on the credit history
of the institution or company, regardless of
its green credentials. 26
Whichever grade of green they occupy, an
interesting trend for a growing number of
investors to think differently about their
investments—that is, to value sustainability
and long-term performance as well as, and
perhaps more than, short-term financial
gains—has been observed. 27 Moreover,
Deloitte’s 2016 survey of millennials 28
shows that this generation of future leaders
and investors care about companies’ triple
bottom line and defines success in terms
of both profit and purpose.
Whatever is driving it, investor appetite is
most definitely growing. Indeed, so far, the
supply of green bonds is not matching the
massive demand, and green bonds tend
to be largely oversubscribed. What’s more,
investor appetite is set to expand from
institutional investors and pension funds to
the whole spectrum of investors including
retail, especially if public authorities create
appropriate incentives for the asset class.
Although the sector is currently not offering
higher returns than non-green bonds of
the same grade (green bonds currently
price flat on issuance with the issuer’s
other debt), they are expected to yield
higher returns in a long-term cycle. Also,
as the spectrum of investors grows, the
market will become more liquid, improving
performance on the secondary market
(for the time being green bonds trade at a
premium on the secondary market up to
20 basis points tighter than conventional
bonds, due to high investor demand on
supply).
As the market goes mainstream, we expect
that financial innovation will bring about
product diversification so as to potentially
match all risk profiles and investment
policies, from green ABS products secured
104