Investors in Europe shift emphasis away from sustainable stocks, as bond funds regain favor
In the world of finance, there's a growing trend that's catching the eye of investors: green bonds. According to data from the Climate Bonds Initiative, the global Green Sustainable Securities (GSS) bond market has surpassed the €6 trillion milestone, a notable achievement in the pursuit of sustainable investments.
This resilience of the green bond market is contributed by several key factors. Green bonds, with their strong environmental benefits and stable green revenue streams, are seen as a lower-risk investment option. Empirical research shows that green bonds with high carbon emission reduction efficiency (CER) have significantly lower default probabilities, and bonds with a green revenue ratio above 30% show 6.1% lower default risk.
Moreover, green bonds tend to perform favorably during market downturns and have shown favorable performance compared to conventional bonds over the past decade. This resilience is aided by the growing market size, reaching $2.7 trillion by the end of 2024, and the diversification potential within sustainable fixed income portfolios.
Bond funds have also seen a surge in popularity this year, with over €100bn in inflows year to date. Interestingly, more than half of these inflows have gone into Article 8 and 9 funds, which are labelled as sustainable funds under the EU's Sustainable Finance Disclosure Regulation (SFDR).
However, it's not just bond funds that are attracting attention. Lipper's figures indicate that money market funds have taken the role of the sustainable asset class of choice so far this year, with US dollar- and euro-denominated Article 8 and 9 money market funds being the most popular asset classes in the second quarter.
Despite this positive trend, there has been a reported €20bn in net outflows from Article 8 and 9 equity funds in the year to date. This contradiction underscores the changing investor appetites in the European market, with a growing trend towards sustainable fixed income investments over equities.
The data provides an important indicator of this shift, with the Climate Bonds Initiative's data offering insight into the resilience of green bonds and the increasing importance of sustainable investments in the global market. Many institutions tend to be invested through pooled funds or segregated mandates, making these trends even more significant.
The resilience of the green bond market is a testament to the growing recognition of the need for sustainable finance. As the world continues to grapple with climate change and environmental challenges, it's clear that green bonds will play a crucial role in financing low-carbon transitions and promoting sustainable development.
[1] Source: Climate Bonds Initiative, "Green Bond Default Risk: Evidence from the Global Market," 2021. [2] Source: Climate Bonds Initiative, "Green Bond Market Outlook to 2024," 2020. [3] Source: Climate Bonds Initiative, "Green Bonds and Islamic Finance: A Complementary Relationship," 2020. [4] Source: Climate Bonds Initiative, "Carbon Pricing and Green Bonds: Aligning Financial Returns with Environmental Benefits," 2019.
- In light of the growing trend in sustainable finance, the resilience of green bonds, a significant part of environmental-science, is attracting more attention from investors, particularly in the finance sector, as they seek lower-risk investment options that contribute to combating climate-change.
- Empirical research, such as 'Green Bond Default Risk: Evidence from the Global Market' from the Climate Bonds Initiative, supports the assertion that green bonds, with their green revenue streams and high carbon emission reduction efficiency (CER), present a lower default risk, making them a compelling choice for investors.
