Green Bond Crisis Premium Theory Debunked by Covid, Manager Says

(Bloomberg) --

Green bonds fared no better than regular debt in the coronavirus-fueled credit rout, confounding a widely held theory that because holders of the debt are motivated by the environmental impact of the securities they may be less prone to losses in a market crash.

That's a key finding of Rob Sawbridge, a senior portfolio manager at London-based Insight Investment, who analyzed whether European credit investors would have benefited in March and April from having an additional focus on environmental, social and governance issues.

Sawbridge, who oversees the Insight Sustainable Euro Corporate Bond Fund, said there is a perception that green bonds should outperform non-green, or brown, counterparts during periods of volatility because “there are more price-insensitive buyers for green bonds, who value them as much for the impact they achieve as the spread they offer.” Still, in the depths of the coronavirus selloff, he said he found “little evidence that green bonds systematically outperformed brown equivalents.”

The Bloomberg Barclays Euro Aggregate Corporate Total Return Index fell 2.6% from the beginning of March to the end of April, while the Bloomberg Barclays MSCI Euro Green Bond Total Return Index declined 2.9%.

Green bonds, where the proceeds from sales are used for environmentally friendly projects, have grown from a niche to a debt market staple in just a few years as institutional investors shift money and attention toward addressing climate change. Investment firms, including Allianz Global Investors and BlackRock Inc., have been keen to demonstrate how sustainable portfolios have weathered the market storms of Covid-19.

While issuance of the debt has slowed in 2020 because of the pandemic, new bonds in May totaled $16.9 billion, up 16% from the previous month, taking sales to $73.6 billion for the year through the end of May, compared with $80.9 billion at the same point last year.

Insight's analysis of green bond performance chimes with that of credit strategists at Barclays Plc, who said last month the main reason green bonds don't trade at a premium to non-green bonds is that issuance has far outpaced the demand from dedicated buyers and therefore “green bond investors have limited influence on market pricing.”

Demand for green securities will increase as “more investors seek to integrate ESG values into their investment process,” said the Barclays' strategists, led by Charlotte Edwards.