The proceeds from green bond issues are allocated exclusively to environmental projects and initiatives promoting greener practices. In recent years, these bonds have gained significant momentum, becoming an effective tool for investors to achieve environmental impact, diversification, and financial returns. The benefits of this transition are numerous, but the journey is challenging and costly. Transitioning companies to sustainable operations requires investment. According to the International Energy Agency (IEA, 2023), USD 4.2 trillion must be invested annually by 2050 to reach global net-zero targets. For investors wanting to contribute to this mission, green bonds are an excellent choice for the reasons outlined below.

In 2023, green bonds were the driving force behind the overall growth of the ESG-labeled bond market, representing a share of more than 60% of ESG bond sales. Issuance of ESG-labeled bonds amounted to USD 311 billion in the first quarter of 2024 exceeding issuance from Q1 2023 by 3%, marking the strongest start to the year ever. Over the last three years there has been a significant surge in green bond issuance in the Asia-Pacific (APAC) region. For example, issuance from APAC in 2021 grew more than three times compared to 2020. This is great news for both investors and issuers, as a broader and well-established green bond universe offers a well-diversified and liquid market globally.

LatAm, the fastest growing region so far this year in terms of green bonds issuance, offers bonds from the harder-to-abate sectors, such as energy and materials. The increased issuance of green bonds by companies from more polluting sectors is trending globally, as more carbon-intensive companies are shifting from sustainability-linked bonds to green bonds to finance transitions in their production processes. As shown in Figure 1 there has been a dramatic rise in the number of chemical companies issuing green bonds in Q1 2024. This increase poses opportunities for green bond investors, as these instruments offer access to sectors where the challenges of decarbonization are greatest, yet the potential benefits of investment toward the transition are most substantial.

Our research has shown that the 'greenium'– the difference in yield between a green bond and a comparable conventional bond — is minimal and returns are comparable to those of regular bonds. Although green bonds tend to be somewhat more expensive on a relative basis in the secondary market, the price difference with regular bonds varies over time. When green bonds are issued in the primary market, new issues are typically offered at a premium to entice investment. In some cases, green bonds have even been priced with a small negative greenium¹. This means that investing in green bonds offers comparable returns to regular bonds, with the added benefit of supporting environmentally sustainable projects.

Companies are becoming more aware of the credibility of green bonds, seeing them as a way to signal their ESG credentials while being able to finance their sustainable projects in an effective way. Moreover, the impact reporting disclosures that accompany green bonds allow investors to precisely track how the proceeds from the bonds they invested in are being used for sustainable projects. This empowers investors to choose how to put their money to work, making them active participants in the sustainability efforts of their investment portfolio.

The case studies below reveal a sample of the scope and breadth of projects made possible by green bonds:

• Within the energy industry, some companies have continued using only green and sustainable financing instruments for all long-term financing. One of these companies has used the net proceeds of green bonds to finance 17 renewable energy projects, including on- and offshore wind, and solar PV assets that contribute to powering 5.9 million people annually. Located in Taiwan, Germany, the UK, and the US, these projects are executed with consideration for potential harm to biodiversity and ecosystems.

• Within the semiconductor space, a company allocated two-thirds of the proceeds of its green bond issued in 2021to finance water management activities, including wastewater treatment plants, sewage treatment plants, and wastewater reuse systems, given the water-intensive nature of the semiconductor manufacturing process. As the demand for semiconductors increases over time, water usage in the semiconductor industry will become a key sustainability factor.
  

Figure 2 illustrates the diverse funding and widespread impact of green, social, and sustainability (GSS) bonds across industries.

Greenwashing is a credible investor concern that is mitigated by the transparency of green bonds and the implementation of sustainable finance taxonomies globally. These taxonomies provide a framework that defines a ‘green’ activity based on environmental performance criteria. So far, 17 taxonomies have been published worldwide, while 29 are in the initiation phase. The increase in certification and standards encourages issuers to show more transparently how the financed projects contribute positively to their environmental objectives. This involves providing detailed reporting on how the funds raised through green bonds will be used to support environmental projects. Investors can be assured that their funds are genuinely financing green projects that contribute to companies transitioning toward a low-carbon economy. Additionally, regulators consider green bonds to be truly sustainable investments, meaning that any change to regulations will not impact the sustainable investment goals of the investor.

The Climate Bonds Initiative is a certification scheme that provides detailed criteria for bonds to be certified as green, confirming they finance projects that deliver climate change solutions. This includes stringent requirements for reporting and verification. Similarly, the forthcoming implementation of the EU Green Bond Standard (EU GBS) will require the issuer to disclose a capex plan in terms of Taxonomy-alignment on a pre-issuance stage, and annual allocation/impact reporting reviewed by an authorized external party on a post-issuance stage. Alongside these voluntary guidelines, Robeco goes further with our green bond framework (see Table 1) to determine the eligibility of green bonds and ensure they align with the regulatory developments described above. If this screening process is applied to the entire green bond universe, around 30% of green bonds would not pass our requirements.

The green bond universe is extensive and provides global diversification for investors. Importantly, we have witnessed a rise in issuance from hard-to-abate sectors and significantly, we have seen increased uptake in green bonds from investors wanting to make an impact. Robeco’s 2024 Global Climate Investing Survey reveals that 43% of respondents are investing in green bonds or sustainability-focused bonds to support the decarbonization of companies and governments. A key reason cited for this was companies’ improved disclosures and the ring-fencing of proceeds. This suggests that green bonds not only have momentum in the market but are also backed by investor confidence.

Our approach to investing employs a disciplined and repeatable investment process, supported by an experienced portfolio management team. These actively managed strategies are overseen by our fixed income team, which boasts a proven track record of over 50 years across both global macro and credit sectors.

The Robeco Global Green Bonds strategy focuses on impact investing with exposure to government and corporate green bonds.

The Robeco US Green Bonds strategy invests in USD-denominated green bonds for long-term environmental impact.

We have recently launched a new Robeco High Income Green Bonds strategy within our credit team. The strategy identifies and invests in high-yielding assets within the green bond universe, meeting the dual goals of sustainable impact and income generation. The strategy has exposure to emerging markets, high yield, and subordinated debt.

Footnote

¹ Scholten & Nederkoorn, The greenium in high-rated Euro bonds, 2024.