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BofA Merrill Lynch says its green bond index is on track for lowest ever annual return

Bank launched index last year with 2010 inception date

Investment bank BofA Merrill Lynch says its green bond index is on track for the lowest ever annual return attributed to income in its five-year history.

The bank launched the index (ticker: GREN) in October last year to track the performance of the evolving market, with a chosen inception date of December 31 2010.

“The index is on pace to record the lowest full-year income return in its five- year history – a level almost 1% below than the previous low of 2.59% set in 2014,” the bank says in a new research report, pointing out that the index yield has averaged just 1.28% over the last five months which does “not add up to very much”.

Despite this, the index’s cumulative annualized return since inception (5.85%) remains ahead of its other flagship investment grade indices.

But it has underperformed all but its Global Government Index peer over the first five months of 2015, including a 0.42% shortfall versus the Global IG Quasi-Government Index.

The comparatively poor excess return caused the index to drop to fourth place in the index family’s information ratio rankings (information ratio measures the risk-adjusted return) – though it remains on top of the Sharpe Ratio rankings. Other indices in the suite include Global IG Government (W0G1), Global Broad Market (GBMI), Global IG Corporate, (G0BC) Global IG Quasi-Government (G0BQ).“The index has posted a lower YTD excess return than other flagship IG indices,” the report says. The information is contained in a new 29-page research report entitled ‘Corporates & EMs going green (bonds)’ compiled by analysts Beijia Ma, Sarbjit Nahal, Felix Tran and Phil Galdi.

“The index has posted a lower YTD excess return than other flagship IG indices.”

The bank says the index captures 74% of what it reckons is now a US$71.5bn market (as at June 12) comprising 400+ bonds, although new issues have come on stream even this week.

The report, essentially a state of play review of the market as it stands, notes that corporates have now become the largest issuers of green bonds, in the shape of TerraForm, TenneT, ABN Amro and others.

The bank adds that for the market to grow it would need “increased standardization, development of second and third party assurance, political support, and overall further maturation and diversification”.

“Our view is that green bonds are a game changer in unlocking private capital for environmental needs,” it says in the introduction.