The first green bond was issued by the European Investment Bank in 2007. “Since then, the market has grown significantly to reach and exceed $500bn per year," says , global market strategist at JP Morgan Asset Management. As a whole, sustainable bonds--including green bonds, sustainable bonds and social bonds--have almost reached the $1trn mark by 2021.

According to Juvyns, “demand for green bonds is expected to remain high, amid growing investor appetite for sustainable securities that offer transparency on product use and continued encouragement from regulators and central banks. This growth is expected to accelerate further in the coming years, with proceeds from green bonds being used to finance the energy transition.”

The Greenium effect

Financing climate investments by issuing green bonds is a good deal for investors. Thanks to the high demand for this type of instrument, they benefit from a “greenium” effect, which consists of slightly lower financing costs compared to traditional bonds.

“However, while this greenium is a financial advantage for issuers, the benefits for investors are less obvious. Why would investors accept a lower return on their investment for reasons other than a regulatory requirement or a non-financial incentive?”

The answer, he says, lies in the “strong fundamental, quantitative and technical factors that underpin demand for green bonds.”

The first of these factors is the more defensive nature of bonds compared to traditional bonds. For the same duration, yields are similar “but with lower spread volatility and better downside protection.”

From a quantitative point of view, the greenium effect is to be put into perspective, “its size is generally limited.” “The Federal Reserve recently estimated that, on average, green corporate bonds denominated in dollars and euros have an 8 basis point lower primary market credit spread than conventional bonds. In addition, following the yield increase in 2022, the share of greenium in the total return has decreased significantly, from almost 10% of the green bond return at the beginning of 2022 to around 2% today. This offsets the impact of what investors see as “a financial cost.”

Accommodating monetary policies

Finally, from a technical point of view, Juvyns insists that demand should remain high. In addition to investor appetite, he is also counting on central bank action to support the market.

“Some central banks see climate change as part of their mandate, with the ECB going so far as to announce that its corporate bonds will be directed towards issuers with better climate performance.”

“The ECB has also recognised the important role that green bonds will play in financing the climate transition and may therefore give preferential treatment to green bonds in its primary market tenders.”

This story was first published in French on . It has been translated and edited for Delano.