NORTHAMPTON, MA /ACCESSWIRE/September 30, 2022/ AllianceBernstein
Green bonds have earned a reputation for providing better downside mitigation than their conventional counterparts. But in this year’s market downturn, the defensive performance of green bonds has been mixed. What does this mean for investors?
We believe the greater performance dispersion we have seen so far in 2022 argues in favor of an active approach to investing in green bonds. With so many green bonds in circulation today, investors need more specific information to tell them apart and better understand the performance characteristics of each bond.
Green bonds have generally been more highly valued than their conventional counterparts and as a result have generally traded at somewhat higher prices and lower yields. Expressed differently, a green bond typically has a negative yield premium relative to its conventional peers, also known as “greenium”. When the greenium of a green bond grows (the negative yield premium becomes more negative), it outperforms comparable conventional bonds. The growth of greenium is therefore positive for the performance of a green bond.
While in the risk-free period of 2020 greeniums rose in parallel, in 2022 greeniums moved to a lesser extent (Display) and with greater dispersion – and in a minority of cases bonds greens did not outperform at all.
Market data on 100 representative euro-denominated corporate bonds shows significant dispersion in green bond performance since the start of the year. While 80% of issuers saw their greeniums turn more negative in the first half (thus outperforming their conventional counterparts), 20% did not and therefore did not show favorable downside mitigation characteristics (Display) .
Moreover, of the 80% of green bonds that saw their greenium increase, the magnitude of the changes varied significantly, ranging from a few basis points (modest downward attenuation) to half a percentage point (strong attenuation on the decline). This market behavior makes a compelling case for an active approach to investing in green bonds and reinforces the idea that not all green bonds should be considered equal. (In fact, we recently defined a comprehensive framework for analyzing green bonds and other ESG-labeled structures.)
Changes in the bond market lead to more differentiated performance
Does this mean that the defensive characteristics of green bonds are eroding? Not necessarily. We believe that green bonds may still offer favorable risk-mitigation characteristics compared to their conventional peers, but investors need to consider several changes in bond markets that result from the growing popularity of responsible investing. While these will likely have an impact on the size of greenium, they also help create a larger and broader universe of green bonds.
- Increased emission. Green investment is becoming widespread. As the market matures, we have seen a significant increase in green bond issuance, which has led to a decrease in the scarcity value assigned to some of these bonds, creating a more balanced dynamic between supply and demand. .
- Wider sector representation. The increase in issuance has also led to the issuance of green bonds across a wider range of sectors. As a result, the composition of the green bond universe has also changed over time: more biased towards cyclical sectors, less biased towards more stable sectors like utilities. This may have resulted in a higher sensitivity to changes in the growth environment in the first half of 2022 than in the first half of 2020.
- Lower average ratings. The increase in issuance has created greater depth and diversity in the green bond market, not only between sectors, but also between quality tiers. This resulted in a lower average rating for green bonds (Display) and therefore higher credit sensitivity. This may have contributed to a decrease in the resilience of green bonds as a whole during periods of risk in 2022.
- Broader investor base. Investor demand has also changed. The buyer base has widened for green bond structures, and so demand is no longer driven solely by investors with longer time horizons, such as institutions. More and more investors are embracing responsible investing and responding to changes in the regulatory environment, such as in the context of the European Sustainable Finance Disclosure Regulation (SFDR).
Over time, we would expect investors to become less willing to pay greenium for weaker structures, especially when the use of the proceeds is only weakly tied to qualifying green projects, or when the issuer and its industry may be more sensitive to allegations of greenwashing. Conversely, strong issues should continue to attract a base of buyers willing to pay one greenium for quality bonds. These are, for example, green bonds that are fully aligned with the EU taxonomy and whose issuer has very strong sustainability credentials.
We believe investors can still find green bonds with defensive characteristics. But we have also observed that the breadth and depth of the green bond market has increased significantly. This means that investors need to differentiate green bond structures more rigorously, based on a careful assessment of the characteristics of each individual issue.
The opinions expressed herein do not constitute research, investment advice or trading recommendations and do not necessarily represent the opinions of all of AB’s portfolio management teams. Views are subject to change over time.
View original content here.
Discover additional media content and other ESG stories from AllianceBernstein on 3blmedia.com.
E-mail: [email protected]
THE SOURCE: AllianceBernstein