Most green bond issuance has been in euros, but Goldman Sachs AM expects this to change.
The majority of issuance in the green bond market has been in euros but Goldman Sachs Asset Management expects this to change in coming years with more in US dollars.
Bram Bos, global head of green, social and impact bonds at Goldman Sachs Asset Management spoke at Reuters IMPACT: Sustainable Reporting / Net Zero/ ESG Investment Europe 2023 in London on 6 September about use of proceeds impact bonds. There are green, social or sustainability bonds where issuers use the proceeds to invest in green or social projects.
Bos highlighted that the impact bond market did not exist eight or nine years ago but this year Goldman Sachs AM projected that it will reach €1.1 trillion.
Bram Bos, Goldman Sachs Asset Management
“This is really good news because that means there are a lot of different possibilities for investors to green their fixed income portfolio,” he said.
Green bonds are by far the biggest, most liquid and most diversified market and, therefore, the preference for most of the asset manager’s clients.
“There is a little bit more urgency to do something about climate change right now,” he added.
The global green bond market was around 12% of global euro bond issuance last year. Bos said: “This is good but clearly not enough. We need much, much more.”
However, green bonds were only 5% of global bond issuance last year, as about 70% of total issuance has historically been in euros.
“Issuers from all parts of the world have sold green bonds in euros but we think that is going to change in the next couple of years,” Bos added. “We have launched a US dollar green bond strategy over the last year because we think there will be growth, mainly from emerging markets, but also in the US.”
Bos argued that investors should buy green bonds not only because they can contribute to achieving something positive but because they will not incur any additional cost, which is crucial. A comparison between a normal fixed income index against the green bond index from the same provider shows that their performance is similar.
“There is more and more proof that the risk and return are pretty similar,” he added. “I would even argue that if you invest in green bonds, you are protecting yourself from having exposure to specific sectors and issuers.”
In particular, corporate green bonds are extremely popular at the moment because there is hardly any difference in terms of performance. As a result Bos said investors should not view green bonds as an additional allocation, but as a replacement for their existing fixed income investment, even though there is likely to be a big change in exposure to industrial companies. He argued this was positive because green bonds help investors select issuers who are innovative and more likely to survive in the long run.
“If you already have some corporate bond exposure, replace it with green bonds,” said Bos. “It is not a one-for-one replacement but you are excluding companies who are probably very late in the transition or not transitioning at all.”
Impact reporting
Bos stressed that impact reporting is extremely important to avoid greenwashing. Investors who own a green bond portfolio need to go through the impact report for each bond to make sure that the data is correct and the methodologies are similar.
This can lead to an aggregated impact number. For example, Goldman Sachs Asset Management publishes carbon emissions saved per €1m invested per year for one of its green bond funds. Investors and asset owners also place increasing importance on mapping to the United Nations’ Sustainable Development Goals (SDGs) for allocation decisions.
It is also important to report on the carbon footprint of a green bond portfolio as just allocating to green bonds does not mean that, by definition, a portfolio will have a low carbon footprint.
“The green bond market is self-labelled so it is extremely important to do your own analysis on the specific green projects being funded and the underlying credibility of the issuer to avoid greenwashing,” added Bos.
For example, if an oil company uses a green bond to fund a windmill but is investing billions in fossil fuels at the same time then they are not a credible issuer. Bos stressed that investors need to put extra dedicated resources in place because verification requires a lot of extra work and needs to continue on an ongoing basis after issuance.
Goldman Sachs Asset Management has been building a large team as it constantly monitors more than 2,000 green, social and sustainability bonds. In their team there are five portfolio managers as well as 21 people in analyst and trading roles.
The firm has launched five dedicated green bond funds but Bos said there are more opportunities in areas such as emerging markets and high yield.
In July this year the asset manager announced the launch of the Goldman Sachs Global Impact Corporate Bond Fund and the Goldman Sachs USD Green Bond Fund. Both funds are managed by a dedicated green, social and impact bonds team who joined the firm following the acquisition of NN Investment Partners in 2022.
Goldman Sachs Asset Management’s global fixed income team manages over $1 trillion on behalf of investors and in July the business said it had recently passed $9bn in dedicated green bond assets under management.
Hilary Lopez, head of EMEA third party wealth at Goldman Sachs Asset Management, said in a statement: “An increasingly wide range of investors would like to direct their capital towards companies solving clear social and environmental challenges. These two funds enable investors to tap into growing areas of opportunity and diversify their fixed income portfolios, while helping to finance impactful environmental, social and sustainability projects.”
