Green bonds issuance ‘gone beserk’

1 October 2021

In the wake of the UK government issuing its first green bond, for this month’s Sector Considerations, the FundCalibre team looks at the growing popularity of this type of bond and how paraplanners can help clients access them.

The popularity of green bonds has grown dramatically in past year.

The chart below shows new issuance going berserk in 2020/2021 – but while raised awareness is one contributory factor it is also a result of quantitative easing, with lots of firms taking advantage of the lower borrowing costs on offer.

The huge uplift in demand is great for companies that are providing these green bonds, but for investors it is not so clear cut – as they are taking similar credit risk but getting a lower return by investing directly.

One pathway that investors may want to consider is accessing these bonds is through investment trusts in areas like renewables and infrastructure.

It’s an area we’ve started to focus on in our team meetings – principally as a result of one of our investment trust holdings switching from normal investment grade bonds into green ones. Following an equity raise, the trust qualified for a green bond with almost no change in its underlying operations, so re-financed, allowing it to cut its borrowing costs by 140 basis points per annum, a huge boon to margins for limited discernible change.

With such growing demand, pessimists will wonder if there is a tipping point where quantity supersedes quality? However, these bonds do need a certain credit rating and have to show their proceeds are being used for a certain type of project. Secondly, having an active manager analysing these bonds will also offer an important insight advantage in separating the wheat from the chaff.

See also: Will green bonds be enough to make a difference?

Professional Paraplanner