As governments and businesses scale up investments to combat climate change, the sustainable bond market is one of the fastest-growing fixed income segments at the moment.
To date, the cumulative amount of green, social and sustainability (GSS) bonds issued globally has exceeded US$3.5 trillion1.
Figure 1: Global GSS bond issuance
Source: World Bank based on data from Bloomberg, as at 30 Sep 2022.
Green bonds lead the way
In recent years, green bonds have emerged as the leading segment of GSS bonds, accounting for 55 percent of total issuance2 in 2022. A key reason for this is the increasing need for green financing.
Figure 2: Green bonds dominate the GSS bond market
As climate risks intensify, many countries have committed to net-zero carbon emissions by 2050. But such efforts do not come cheap. A study by McKinsey estimates that capital spending to reach net-zero emissions would need to increase by US$105 trillion over the next 30 years3.
In line with the growing demand for green financing, the global issuance of green bonds has been steadily rising in recent years, reaching about US$473 billion in 2023. This trend is poised to continue. The Institute of International Finance forecasts that by 2025, annual issuance could be as high as $1.2 trillion, which will help finance:
Strong support for green bonds in Singapore
As a low-lying nation, Singapore is especially vulnerable to the effects of climate change. The Singapore Green Plan 2030 (“Green Plan”) seeks to advance Singapore’s national agenda on sustainable development and pave the way for us to achieve net zero emissions.
Green bond issuances are an effective way to support these targets and finance Singapore’s transition to a net zero economy.
To that end, several initiatives have been put in place:
To find out more, watch Koh Hwee Joo, Senior Director of UOBAM’s Sustainability Office, as she shares her outlook on Singapore’s green bond market.
Why invest in green bonds
Beyond the desire to “do good”, investors hold green bonds for the same reasons they invest in traditional bonds – returns and income.
Historically, the duration-adjusted returns of green bonds have similar characteristics to non-green bonds.
Figure 3: Duration-adjusted returns (%) of green and non-green bonds
Sources: Bloomberg, J.P.Morgan Asset Management. Data as at Jan 2023
But over time, green bonds’ additional benefits will likely come more to fore:
1. More defensive than conventional bonds
Green bonds tend to be more defensive than traditional investment-grade corporate bonds because issuers of green bonds are typically large, stable entities such as financial institutions and utility companies6. Such entities usually hold up well even during a downturn.
Green bonds also tend to exhibit lower volatility over time. Many green bond investors such as pension funds have a longer-term horizon. As such, they are unlikely to panic sell their holdings in a crisis.
2. Strong growth potential
As the world transitions to a low-carbon economy, the demand for green bonds should remain elevated. This is set to drive the continued growth of the green bond market.
With new issuers entering the market, investors can also expect to see a more diverse investment opportunity set in terms of issuer type, sector, geography, and credit quality.
1World Bank, Green, Social, and Sustainability (GSS) Bonds, November 2022
2S&P Global, Sustainable Bond Issuance Will Return To Growth in 2023, Feb 2023
3McKinsey, How Big Business Is Taking the Lead on Climate Change, Mar 2022
4Climate Bonds Initiative, ASEAN Green Finance: State of the Market 2020, Apr 2021
5Bain, Southeast Asia’s Green Economy 2021: Opportunities on the Road to Net Zero
6Composition based on the Bloomberg MSCI Global Green Bond Corporate 5% Issuer Cap Index as of 26 April 2023
If you are interested in investment opportunities related to the theme covered in this article, here is a UOB Asset Management Fund to consider:
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