The green bond market is also deep and diverse enough to offer all investors the opportunity to make a positive environmental impact along with attractive returns. Institutional investors have been piling into green bonds over the past few years, attracted by the market’s size, liquidity and performance, and their participation will help fuel continued rapid expansion. On the supply side, governments around the world are stepping up issuance of green bonds to finance projects such as green infrastructure and renewable energy. New corporate issuers including electronics manufacturers, and shipping companies have also entered the market, encouraged by the presence of common standards and definitions such as the European Union’s taxonomy for sustainable activities and the Green Bond Principles endorsed by the International Capital Market Association (ICMA). This growth momentum and the expanding range of products available have made green bonds a strong alternative to conventional fixed income products. They typically offer similar or better financial performance and a tangible, positive impact on the planet. In addition, they are tracked at issuer and project level, providing transparency on how investors’ money is used and the impact it generates.

Rapid market growth

The green bond market has come a long way in a relatively short time. The first green bond was issued in 2007 by the European Investment Bank, the EU’s lending arm[1]. That was followed a year later by the World Bank[2] In 2013, Swedish property company Vasakronan issued the world’s first green corporate bond[3]. Market growth was slow at first, but began to take off with ICMA’s publication of the Green Bond Principles in 2014. The signing of the Paris Agreement and the adoption of the UN SDGs the following year spurred further expansion as governments and companies rallied to address climate change. Since 2015, the market has expanded by an average of 60% per year. By 2021, green bonds had become a mainstream fixed income market larger than European high-yield bonds and global convertible bonds. And rapid growth is expected to continue. New issuance reached EUR 440 billion last year, and we see this number surging to EUR 600 billion in 2022 despite a dip in the first quarter compared with the first three months of the previous year. A key factor driving green bond growth last year was the “bounce-back” of issuance postponed in 2020 by the Covid-19 pandemic and resulting disruption to bond markets. Governments in countries including Italy, Spain and the UK also added to the market momentum with debut sovereign green bond issues. The introduction of the EU taxonomy, which sets green criteria for projects and economic activities, has been important in encouraging investment. The EU also began green bond issuance under its NextGenerationEU recovery programme.

Europe leads the way

Europe will continue to be the engine of green bond growth. We expect the EU to issue between EUR 50 billion and EUR 75 billion in green bonds in 2022 to finance NextGenerationEU, though this number could go higher if the bloc accelerates issuance. The EU plans to issue as much as EUR 250 billion in green bonds under the programme by the end of 2026, making it the world’s largest green bond issuer. Denmark tapped the green bond market for the first time in January 2022, selling DKK 5 billion of new debt to fund the country’s energy transition. Green bond issuance may reach DKK 15 billion in 2022[4]. The UK also plans to step up issuance in the 2022-2023 fiscal year with GBP 10 billion of green gilts. Rather than launching new bonds, the Treasury will build up two existing green gilts with the goal of ensuring they mirror other benchmark bonds in terms of liquidity[5]. Outside of Europe, Canada entered the market in March 2022 with its inaugural CAD 5 billion green bond to finance investments in green infrastructure and other environmental projects[6]. Colombia, India and Singapore are considering selling green bonds in 2022, and countries including Chile, Egypt and Indonesia are preparing to return to the market. With the market growing rapidly, investors will benefit from greater diversification and range of investment options.

Global climate push

Climate initiatives will also encourage green bond issuance, with governments making greater commitments to improve their environmental practices. More than 70 countries have set net-zero targets that cover about 76% of global greenhouse gas emissions in regions including the world’s biggest polluters -- China, the US and the EU[7]. The 2021 UN Climate Change Conference (COP26) introduced new targets on biodiversity, coal and methane emissions. These initiatives should ultimately be reflected in regulatory changes. Companies should expect investors to demand more detailed information about their plans to address deforestation and phase out fossil fuels.

Boost from regulation

Regulation will also strengthen and broaden the market by requiring greater disclosure and transparency. In Europe, asset managers and other financial market participants are stepping up reporting to comply with the Sustainable Finance Disclosure Regulation (SFDR), including detailed information about how they reduce negative impacts their investments could have on the environment. In general, corporates also face more stringent reporting rules. In Europe, the Non-Financial Reporting Directive requires about 11,700 large companies to disclose environmental, social and governance (ESG) information. A proposed successor to NFRD, the Corporate Sustainability Reporting Directive, would expand that requirement to about 50,000 companies[8]. In the US, the Securities and Exchange Commission is also considering mandating climate-risk disclosures by public companies[9]. These regulatory initiatives should encourage companies to adopt more sustainable business models, expanding the investable universe for green bond investors. By providing greater transparency and comparability of ESG data, these regulations should also boost the credibility of the sustainable investing market, including green bonds, leading to a scaling up of investment.

Green bond pioneer

NN Investment Partners has a long track record of delivering significant impact and consistent returns with its green bond products. We started our first fund in 2016 with EUR 20 million. That has now developed into four dedicated green bond funds and a number of client-specific mandates with a total of EUR 5 billion of assets under management. Green bonds are a natural addition to our product range and fit perfectly with our approach to responsible investing, which is built on the principles of putting capital to work and improving returns. We are dedicated to contributing to the transition to a sustainable, low-carbon economy that benefits all our stakeholders and society at large. NN IP’s role as a responsible asset manager begins with offering innovative financial products such as our green bond funds that help clients achieve their ambitions. Our experience in the market and full range of green bond strategies have made us the partner of choice for many clients who want to invest in this asset class. Over the years, our position in the market has also enabled us to develop strong relationships with corporate and sovereign issuers. Read more about our commitment to green bond investing in our Green Bond Funds Impact Report for 2021.

[1] Source: European Investment Bank [2] Source: World Bank [3] Source: Vasakronan [4] Source: Reuters [5] Source: HM Treasury [6] Source: Department of Finance Canada [7] Source: United Nations [8] Source: European Parliament [9] Source: SEC

Bram Bos, Co-Lead Portfolio Manager Green Bonds

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