Wealth Management and Private Banking

10 June 2021

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Expert: Bram Bos, Lead Portfolio Manager, Green Bonds, NN Investment Partners; Facilitator and Jo Goddard, Founder and lead consultant, Green & Good Consulting

Key Takeaways:

  1. The green bonds market is developing quickly, with huge growth seen in 2021
  2. Fear of greenwashing is an issue, with the majority of participants seeing this as a barrier
  3. Classification systems, such as the EU Taxonomy and the Climate Bonds Initiative, are a help rather than a hinderance in the market
  4. Engagement with businesses is key to green economy transition
  5. Impact reporting showing performance and impact of the portfolio engages clients 


The green bond market has seen a rapid growth during the year, which is expected to continue. It is being driving by more regions and sectors issuing bonds and by a general maturity in the market. However, it faces some issues, notably that of fear of greenwashing. Tools such as classification systems or taxonomies, and even regulation, have been developed to assuage these fears and to present a more robust and balanced approach to the market, on top of fund managers IP.  Given this position, we discuss the green bond market position currently, the risks and opportunities associated with it and the tools investors use to engage both the companies they invest in and the end client they aim to attract. 


1. The green bonds market is developing quickly, with huge growth seen in 2021

Green bonds have seen a huge growth during the first half of 2021, with growth expected to exceed expectations for the rest of the year. So far, the market has seen €100bn of growth coming from a diverse range of issuers.  The Italian government have issued their first bond, and the rest of the world is opening up with the US and China also entering the market.  NNIP estimate that, by the end of the year, the green bond market will be larger than EU high yield market, i.e very liquid and trading on a daily basis.

Green bonds are now performing a little better than regular income too, albeit with a lower yield, and it’s becoming more understood that a portfolio of green bonds is a good way of selecting companies that will survive and perform better in the long term. This is all positive, however, there are some perceived barriers to growth, namely a fear of greenwashing.

2. Greenwashing, and other barriers to growth

In a poll during this session, fears of greenwashing were the greatest barrier to green bonds investment (45%) with inferior returns at 31% and insufficient market capacity at 23%.

So, what is driving this fear?  There is some concern around diversification – possibly a lack of suitable candidates eligible for green bonds inclusion.  The volatility of corporate green bonds is a little high and less diversified, however this volatility is shrinking, and the premise of green bonds is to some degree protect long term holds, they are by nature therefore more stable. The market is smaller but for good reasons – this smaller universe is due to some companies not being selected (oil & gas for example).

In terms of the growing market and increasing diversification, China has now set a 2060 carbon neutral target and it is true to say they have a lot to do to decarbonise. Green bonds will undoubtably help this transition, however, accessibility for foreign investors is a struggle currently, with transparency and green quality being different to the EU market.  Not all Chinese green bonds will meet EU Taxonomy and fund manager’s standards.

Looking to the US, the market here is now changing. Subsidies for fossil fuel production has stopped, which will likely create a shift in the market, with green bonds or transition bonds become more prevalent. 

What exactly is greenwashing?  For green bonds, it refers to some good environmental projects being tackled while the larger, more material environmental issues go untouched. For example: a green bond was recently issued by Royal Schiphol airport – primarily to raise capital for retrofitting buildings with energy efficient lightening and such, as well as greening the airport’s fleet. However, the airport was also expanding with new runways and terminals needing to be built with these also being the recipient of the green fund investment.  As airport expansion inevitably leads to increased greenhouse gas emissions, it was determined that this particular bond did not meet the requirements of the Climate Bonds Initiative or EU Taxonomy and would therefore not be classified a green bond.

3. Taxonomy and regulation

In the current green bond market, some sectors are dominant i.e utilities, banks and financial services.  Industrials are missing from green bonds by and large which can be linked to the common taxonomies within the market.

A taxonomy is a clear definition or catalogue of actions that can be classified as eligible for a green bond.  Examples of these include electric car development, renewable power infrastructure and flood defences.  These taxonomies, including the EU Taxonomy, Climate Bond Initiative and Green Bond Principles, are meant to give clarity rather than hold it up.

These standards are very comparable to each other and are the most commonly used standards with fund managers building their own frameworks to incorporate these and their own thinking to define what ‘green’ is. 

4. Engagement is key to affect change

Engaging with a company before and during the investment period is essential – both in terms of understanding the position and trajectory of the bond, and to encourage change if needed.  By way of example, NNIP carry out a three-year engagement process at a company level, with dialogue specifically to discuss the bond and its alignment to corporate development.  With this process they have had some success in changing projects, however changing the direction of a company is challenging, as is influencing government decisions.

And in some markets, emerging markets for example, the practice of engagement is not so openly welcomed. 

Clients investing in green bonds are becoming more interested in the impact the bond has, alongside the return. Impact report showing what the performance is and what impact is being made are becoming more commonplace. Indeed, for some funds, those which have a SFDR article 9 classification (i.e a sustainable fund) for example, reporting is a mandatory requirement with specific KPIs to prove they are sustainable.  With the increase in impact reporting, it is feasible that in the future it may become more likely that reports start to match client specific requirements.

5. Labelling – a big challenge

Through innovation, by issuers and others, new labels for bonds have emerged.  We currently have a plethora of bonds in a relatively similar space, namely: sustainability-linked bonds, green bonds, social bonds, sustainability, blue bonds etc.

Whilst fund managers engage to ensure the given is clear, the market is starting to get a little mixed.  This shows some of the challenges faced by all concerned, issuers, fund managers and the end client. These terms may start to dilute the impact of these bonds and in turn increase the fear of greenwashing.

In a poll during this session participants voted equally for the issues for green bonds, transition bonds, sustainability-linked bonds and social bonds.  This could equally show an interest in all types of bond or confusion about the different bonds.

In Conclusion – the interest in green bonds, and those linked to doing environmental and social impacts, is there. The market is growing and diversifying, and even though the fear of greenwashing is real, it is clear that an issuance of a green bond can determine that a company is going in the right direction environmentally. The key to success is in the transparency of what they are doing and engaging to influence change if needed.