Green bonds are playing an increasingly significant role in not only shifting capital towards sustainable activity, but also in ensuring that companies increase their engagement with investors and boost their own sustainability ambitions, according to NN Investment Partner’s (NN IP) latest Green Bond Impact Report.
Green bonds differ from conventional fixed income securities in that proceeds are earmarked for new and existing projects which deliver environmental benefits, and a more sustainable economy. These include renewable energy, green buildings, water management, clean transportation and adaptation to climate change.
One point that remains in the debate is whether the securities generate additional capital for environmental protection and climate action, given that they may be issued to refinance existing green projects or facilities that the company has already.
To address this, NN IP’s green bond strategy takes the approach that the bond alone is not enough to ensure the green label and that the issuing party should also be engaged in sustainable behaviour for their green bond to pass the screening. Luckily, there has been strong evidence found in research¹ from NN IP that green bond issuers have a much higher likelihood of adhering to the 1.5°C or 2°C scenario in the Paris Accord than non-green bond issuers. Nevertheless, even though this would indicate that green bond issuers were engaging in more sustainable behaviour on average, engagement is key to ensuring the highest ambition through collaboration. NN IP’s Green Bond Impact Report details this with various engagement case studies from the past year, with positive results.
Long gone are the days where investors would know little about the companies they invest in, the projects and engagement examples in NN IP’s Green Bond Impact Report highlight the difference that can be made by actively engaging with investee companies.
Kaili Mao, Green Bond analyst at NN Investment Partners: “Frequent dialogue with issuers throughout the life of a bond, from preparing for issuance to reporting on impact, also provides vital input for our analysis. Engagement allows us to enhance our understanding of issuers and to advise them on best practices.”
NN IP held dialogues last year with 87 green bond issuers operating in 10 sectors around the world. One example is its engagement with Mercedes Benz², which is aiming to achieve CO₂ neutrality for its new passenger fleet and all of its manufacturing facilities by 2039. It has issued green bonds allocated to a project that gives batteries that can no longer be used in vehicles a second lease of life as part of a system for storing electricity. NN IP’s impact attributable to the bond is 60 metric tons of GHG emissions avoided annually per €1 million of investment.
Bram Bos, Lead Portfolio Manager Green Bond at NN Investment Partners: “Green bond are now a mainstream fixed-income market, and we expect this rapid growth to continue. We expect issuances to reach €600 billion in 2022 despite a dip in Q1, with Europe fuelling green bond growth through its NextGenerationEU recovery plan. We hope that regulation will also continue to strengthen and broaden the market by requiring greater disclosure and transparency.”
The report also shows that annual greenhouse gas (GHG) emissions avoided is the most frequently reported green bond impact metric. It emanates from a range of projects, such as renewable energy plants that help reduce reliance on fossil fuels, and public transportation that allows people to travel less in private cars.
This metric for its four funds – NN (L) Green Bond, NN (L) Corporate Green Bond, NN (L) Sovereign Green Bond and the NN (L) Green Bond Short Duration – show GHG avoided totalled 532,920 metric tons of CO₂ in 2021. The higher emissions prevented per million euros invested in NN (L) Corporate Green Bond is attributed to the higher allocation percentage to the alternative energy category.
NN IP’s impact metric calculation is based on data from its own green bond database. NN IP tracks and assesses 1,140 bonds covering 10 sectors in 51 countries/regions.
