Dear green bond market colleagues:
It is in the midst of market volatility when we really prove our long-term belief in sustainable assets. Green bonds have now cheapened significantly. The main worry of a green bond investor two weeks ago was how to source new bonds. But with recent spread widening and a fall in bond prices, the investment case today is much stronger for them – if you are confident in the long-term investment case – and there is no lack of supply, to put it mildly.
Moreover, the positive impact of putting money to work in green bonds today when liquidity is scarce, is multiples of what it was only weeks ago. Prior to this crisis, we had debates around the ‘additionality’ of green bonds: the financing would happen whether the bond was green or not and thus investors had little sense of impact. Today, investments in green bonds may actually provide finance to environmental projects that would not happen otherwise.
In the long-term perspective, if we can show that green bond markets are holding up better than ‘fossil’ markets through this, we will have a powerful narrative. This is also a quantitative finance story. If the data, post-crisis, will show that green assets had less volatility than brown assets, this will directly link to lower funding costs for green issuers in the future. So buying into the market here can have long-term effects on lower green project financing costs.
But who has the capacity to step out into this maelstrom of market volatility? It is natural that many funds and asset managers are nursing losses and may currently be incapacitated. Hence, I would kindly ask some of the AAA supra- and sub-national institutions to step in, and do it in size.
We have seen some of these institutions, who also issue their own green bonds, set-up internal funds to invest in market green bonds. I admit I have previously not been very excited about that because of bull market crowding-out effects. Please accept my apologies.
These institutions should really seize the opportunity to buy much cheaper green bonds, with much higher impact, at this juncture.
If the data, post-crisis, will show that green assets had less volatility than brown assets, this will directly link to lower funding costs for green issuers in the future. So buying into the market here can have long-term effects on lower green project financing costs.
Take the Nordic Investment Bank (NIB) for example. In a posting in November last year, they indicated that they had €130m invested out of their €500m intended allocation. The maths is not very difficult: use the remaining €370mn here. You will become rock-stars of the green bond world, when you lift offers day in and day out over the next few weeks.
Other institutions that might be able to step in here would be the Kreditanstalt für Wiederaufbau (KfW) or perhaps the European Investment Bank; and why not use some of the unused spending capacity of the IFC Amundi Emerging Green One fund to invest temporarily in market green bonds, rather than private loans? I am sure the principals at either outfit will not disagree. And if you need money to do it, why not issue AAA-rated green bonds? I anticipate that there is private demand for green collateral-worthy safe-assets here.
Such actions would be very important for the green bond market, and I personally believe it will be a good trade. The renewables revolution will continue, and once we get back on track, the demand for green investment cases will be greater than ever. We have ourselves increased the allocations to green bonds in our Diem strategy model portfolio.
Ulf Erlandsson heads the Diem Green Credit hedge fund and is a Board Member for Cicero Shades of Green.