Pension Funds Letter 8 - Expanding Green Fixed Income Markets: Let’s Do It Now!

The clock is ticking for asset owners when it comes to the development of green fixed income markets. Indeed, to meet the climate commitments under the Paris Agreement and finance the associated energy transition, Europe is missing an estimated EUR 180bn of yearly funding until 2030. To reach this level of investment, green finance must mobilize all of the debt capital markets.

Even if there is still a long way to go, a series of positive factors currently at play have been identified, which could accelerate the expansion of green fixed income.

In a recently published study, Amundi Research teams have established a positive relationship between ESG and performance for investment grade EUR-bonds from 2014 to 2019. It has also demonstrated that the cost of capital is lower for issuers with high ESG-scores. These significant discoveries should clearly foster the development of ESG fixed income instruments, both on the investment and finance sides.

Another set of good news come from the finance community directly, where several asset owners have already acted to boost the green fixed income markets. While central banks are progressively integrating more and more climate-related risk into their monitoring framework, several development and investment banks, such as the IFC, the EIB or the AIIB (1) , have led successful partnership initiatives to stimulate the growth of green fixed income markets. Pension plans, along with their asset management partners, will also have a key role to play on both the supply and demand sides of these markets.

Additionally, green fixed income provides an array of opportunities for institutional investors, in particular when exploring the new frontiers of this asset class: the “issuer frontier”, encompassing both public and private issuers; the “instrument frontier”: covering the whole credit spectrum, including high yield bonds and private debt; and last but not least, the “geographic frontier”, going beyond developed markets towards emerging markets. In this area, it seems interesting to point out that, aside private partnership initiatives, new investment solutions are now available to all investors, such as emerging markets green bond solutions focusing on corporate credit, a particularly appealing asset class considering impact opportunities and financial attractiveness.

From the outperformance of ESG fixed income to the many innovative initiatives led by major players of the finance community, everything seems in order for all asset owners to accelerate their contribution to the expansion of green fixed income markets. So let’s do it!

^{(1) IFC: International Finance Corporation, member of the World Bank Group; EIB: European Investment Bank; AIIB: Asian Infrastructure Investment Bank.}