Investment | 19 October, 2018

What are profitable and socially responsible bonds?

Héctor Ferreiro Portfolio Manager

At BBVA Switzerland, we are conscious that our main mission is to safeguard our clients’ wealth, but this objective is not incompatible with maintaining our commitment to a sustainable future. What are profitable and socially responsible bonds?

As we have mentioned in previous articles, green bonds and loans are an increasingly common type of investment in financial markets. The volume of issues has multiplied five-fold in the last four years, up to 161 billion dollars in 2017 and it is forecast that it will reach 210 billion dollars for 2018.

To ensure the success of these issues, the International Capital Market Association (ICMA) has prepared a set of guidelines called The Green Bond Principles (GBP) which have four core components:

  1. Use of funds: all designated Green Projects should provide clear environmental benefits, which will be assessed and quantified by the issuer.
  2. Process for Project Evaluation and Selection
  3. Management of Proceeds
  4. The issues must have easily available and up-to-date information on the use of the funds.

There are currently four types of Green Bonds (other types may arise as the market continues to grow, which will be incorporated into the annual GBP updates):

  • Standard Green Use of Proceeds Bonds: a standard recourse-to-the-issuer debt obligation aligned with the GBP.
  • Green Revenue Bond: a non-recourse-to-the-issuer debt obligation aligned with the GBP in which the credit exposure in the bond is to the pledged cash flows of the revenue streams, fees, taxes etc., and whose use of proceeds go to related or unrelated Green Project(s).
  • Green Project Bond: a project bond for a single or multiple Green Project(s) for which the investor has direct exposure to the risk of the project(s) with or without potential recourse to the issuer, and that is aligned with the GBP.
  • Green Securitised Bond: a bond collateralised by one or more specific Green Project(s). The first source of repayment is generally the cash flows of the assets. This type of bond covers, for example, securitisations of rooftop photovoltaic solar energy assets and/or energy efficiency assets.

Contrary to what you might think, the return on this type of product is no less than that on other assets.

In the following graph we can see the performance of the Solactive Green Bond Index, which deals with investment grade green bond issues denominated in EUR and USD, which, when compared with the index of investment grade issues in USD, has performed better and with less volatility.

In the table below showing asset yields since 30/09/2016 (from approximately this date there was a growth in green issues) we can see that the return on the Green Bond Index outperforms that of investment grade issues.

Within the group, we here at BBVA Asset Management have recently opted for this kind of thematic fund: