We believe sovereign green bond issuance will rise further, bringing the issuer mix closer to what we see in the global bond market and increasing the size and diversity of the bonds on offer to investors.
Sovereign green bonds are increasingly used help to fund government investments in projects with environmental objectives (mostly climate change mitigation). In 2022, clean transport was the main beneficiary (almost 50%) of investment from green bond issuance by euro area governments, followed by energy efficiency (including green construction) and renewable energy which together represent a third of allocations. Progress has also been made in strengthening green capital markets with the European Green Bond Standard designed that aims to increase and expand the environmental ambitions of the green bond market.
With energy independence and security rapidly climbing the governmental agenda, even more may decide to issue green bonds to finance the transition, rather than rely on external fuel sources or less direct funding. That could create an interesting evolution of the market and offer new opportunities for fixed income investors.
Green bonds are a way for investors to get more certainty about the effect they make. With “use of proceeds” rules and impact reporting, they can be sure they’re funding green projects.
It means green bonds are both a powerful and positive investment. For all the alarming statistics on global warming, humanity still has a big opportunity to limit climate change before it’s too late. Scientific research has determined +1.5°C as the point after which there would be a catastrophic impact on the environment, our societies and life on earth. There’s a phenomenal amount of investor cash that could be mobilised to help keep warming at or below 1.5°C.
Green bonds provide a route forward to shift those trillions into projects where they will make the most difference.
Of course, for most people it’s not practical to buy and sell individual green bonds. Fortunately, specialist green bond ETFs offer an efficient alternative, bringing together labelled green bonds and providing them for investment in a simple ETF wrapper. Our Green Bond ETF is the original, and still by far the largest with €613 million under management.[2].
We measure and report on its allocation of proceeds. In 2022, the top three sectors to receive proceeds from this ETF were Energy (41%), Green Buildings (28%) and Clean Transport (14%)[3].
Please note: The approach implemented by the Lyxor Green Bond (DR) UCITS ETF by investing in green bonds is largely based on third party data that may be incomplete, inaccurate or unavailable from time to time, and which make it dependent on the quality and reliability of such information. Investment in green bonds may also induce sectoral biases in the global bond market. For more information, please refer to the prospectus of the fund.
Adding green bonds to your portfolio
If it’s not clear enough already, we strongly believe green bonds are a crucial part of the climate transition. That’s why we offer a growing number of options for adding green bonds to a portfolio, including aggregate bond and corporate bond ETFs, as well as a Euro Government tilted Green Bond ETFs.
In this article, we’ve touched on the positive effects that can be achieved at a (relatively) small scale. Now imagine what more we could achieve if the vast potential of the bond market shifted to green investments.
[3] Source: Amundi. Lyxor Green Bond ETF Range: Impact Report 2022
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CONCENTRATION RISK – Thematic ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive, it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark.
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