Goldman Sachs Asset Management
Green bonds: Financing the transition to a low-carbon economy
By Bram Bos, Global Head of Green, Social and Impact Bonds at Goldman Sachs Asset Management
Green bonds are growing fast.1 Since the first green bond was issued in 2007, the global market has expanded to $2.5 trillion2, driven by a widening range of issuers and investors. At Goldman Sachs Asset Management, we think this rapid growth and the increasing number of mutual and exchange-traded funds offering exposure to green bonds have made them a viable complement to existing fixed income allocations, subject to investors' risk tolerance and investment objectives.
We believe that green bonds’ transparent use-of-proceeds structure and their focus on delivering measurable environmental benefits make them an effective tool for issuers to finance the climate transition3. For investors, green bonds exhibit similar risk and return characteristics as traditional bonds, while potentially helping improve a portfolio’s alignment with global climate initiatives such as the United Nations’ Sustainable Development Goals.
The ultimate goal of any fixed income investment is to maximize risk-adjusted returns, and green bonds are no different. Analysis by our Green, Social and Impact Bonds team shows that risk-adjusted returns from green bonds were similar to those delivered by their conventional counterparts over the period from 2016 through the first half of 2024. In the period from 2016 through the first half of 2024, the global green bond market delivered an annualized return of 2%, slightly lower than the 2.1% returned by the overall bond market.4
The similarity of performance is even more pronounced in the euro-denominated bond market, where green bonds were on par with the overall market during this period.5 In our view, this parity likely results from the fact that the euro-denominated green bond market is well developed and diversified and resembles the euro bond market in aggregate.
There are differences between green and conventional bonds, of course, and they go beyond the green label. Financial institutions and utilities account for a larger share of the corporate green bond market than they do in the broader corporate fixed income market, while industrial companies make up a smaller share.6 The green bond market is led by euro-denominated bonds, whereas in the overall market the U.S. dollar occupies the top spot.7 These and other differences could affect investors’ decisions about how much they want to allocate to green bonds and which conventional bonds they can replace in their portfolios subject their risk tolerance and investment objectives.
As the diversity of the green bond market has increased, the green bond investor base has also broadened. No longer limited to dedicated environmental, social and governance (ESG) and impact investors, green bond holders now increasingly include traditional fixed income investors. Improving transparency and labelling are also contributing to the segment’s popularity.
At Goldman Sachs Asset Management, we believe that investing in green bonds requires the same active investment approach as traditional bonds. Selecting an asset manager with a strong fundamental research process and robust risk management is crucial, and in our view can potentially help investors limit downside risk and uncover the opportunities with the most attractive potential returns.
Learn more in our Green Bond Market Guide.
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[1] The expansion of the green bond market can be seen in the increase in issuance to $655 billion in 2021 from about $87 billion in 2016. Issuance tailed off slightly after 2021, but remained above $500 billion in both 2022 and 2023. Source: Goldman Sachs Asset Management, Bloomberg. Data as of December 31, 2023. Calculation made on June 30, 2024.
[2] Goldman Sachs Asset Management, Bloomberg. As of June 30, 2024. The world’s first green bond was issued by the European Investment Bank in 2007. See "EPOS II - The ‘Climate Awareness Bond’: EIB Promotes Climate Protection Via Pan-EU Public Offering," EIB press release. As of May 22, 2007.
[3] A green bond’s use of proceeds is set out in its legal documentation. All eligible projects financed by a green bond should provide “clear environmental benefits” that the issuer should assess as well as quantify, where this is feasible, according to the Green Bond Principles.
[4] This conclusion is based on a comparison of the hedged Bloomberg MSCI Global Green Bond Index with the hedged Bloomberg Global Aggregate Index, both calculated in U.S. dollars. Source: Goldman Sachs Asset Management, Bloomberg, MSCI. As of June 30, 2024. Prior to 2016, the green bond market was not sufficiently developed to allow for a meaningful comparison.
[5] This conclusion is based on a comparison of the Bloomberg MSCI Euro Green Bond Index with the benchmark Bloomberg Euro Aggregate Index. Both indices returned an annualized 0% over the period. Source: Goldman Sachs Asset Management, Bloomberg, MSCI. As of June 30, 2024.
[6] Goldman Sachs Asset Management, Bloomberg. As of June 30, 2024.
[7] Ibid.
Environmental, Social and Governance (“ESG”) strategies may take risks or eliminate exposures found in other strategies or broad market benchmarks that may cause performance to diverge from the performance of these other strategies or market benchmarks. ESG strategies will be subject to the risks associated with their underlying investments’ asset classes. Further, the demand within certain markets or sectors that an ESG strategy targets may not develop as forecasted or may develop more slowly than anticipated. Any ESG characteristics, views, assessments, claims or similar referenced herein (i) will be based on, and limited to, the consideration of specific ESG attributes or metrics related to a product, issuer or service and not their broader or full ESG profile, and unless stated otherwise, (ii) may be limited to a point of time assessment and may not consider the broader lifecycle of the product, issuer or service, and (iii) may not consider any potential negative ESG impacts arising from or related to the product, issuer or service. Investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. The value of securities with variable and floating interest rates are generally less sensitive to interest rate changes than securities with fixed interest rates. Variable and floating rate securities may decline in value if interest rates do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Credit risk is the risk that an issuer will default on payments of interest and principal. Credit risk is higher when investing in high yield bonds, also known as junk bonds. Prepayment risk is the risk that the issuer of a security may pay off principal more quickly than originally anticipated. Extension risk is the risk that the issuer of a security may pay off principal more slowly than originally anticipated. All fixed income investments may be worth less than their original cost upon redemption or maturity.
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Index Definitions “The Bloomberg MSCI Global Green Bond Index aims to track fixed-income securities in which the proceeds, or an equivalent amount, will be applied to projects or activities that promote climate or other environmental sustainability purposes (green bonds). An independent research-driven methodology created by MSCI ESG Research, called the MSCI Green Bond and Green Loan Assessment Methodology, is used to evaluate index-eligible green bonds. The index excludes issuers with a “Red” MSCI ESG Controversy Flag and negatively screens issuers involved in certain business activities related to certain controversial weapons, or that derive 15% or more revenue from thermal coal mining. Unlike the Bloomberg Global Aggregate Index, the Bloomberg MSCI Global Green Bond Index does not have a minimum time to maturity of one year. Instead, the Index will hold bonds until final maturity.” Source: Bloomberg MSCI ESG Fixed Income Indices, Bloomberg. As of July 30, 2024.
“The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-eight local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. There are four regional aggregate benchmarks that largely comprise the Global Aggregate Index: the US Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, and the Canadian Aggregate Indices. The Global Aggregate Index also includes Eurodollar, Euro-Yen, and 144A Index-eligible securities, and debt from five local currency markets not tracked by the regional aggregate benchmarks (CLP, COP, MXN, PEN, and ILS).” Source: Bloomberg Fixed Income Indices, Bloomberg. As of October 7, 2024.
“The Bloomberg MSCI Euro Green Bond Index aims to track fixed-income securities in which the proceeds, or an equivalent amount, will be applied to projects or activities that promote climate or other environmental sustainability purposes (Green Bonds). An independent research-driven methodology created by MSCI ESG Research, called the MSCI Green Bond and Green Loan Assessment Methodology, is used to evaluate index-eligible green bonds. The index excludes issuers with a “Red” MSCI ESG Controversy Flag and negatively screens issuers that have business activities related to certain controversial weapons, or that derive 15% or more revenue from thermal coal mining. Unlike the Bloomberg Global Aggregate Index, the Bloomberg MSCI Euro Green Bond Index does not have a minimum time to maturity of one year. Instead, the Index will hold bonds until final maturity.” Source: Bloomberg MSCI ESG Fixed Income Indices, Bloomberg. As of July 30, 2024.
“The Bloomberg Euro Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, euro-denominated, fixed-rate bond market, including treasuries, government-related, corporate and securitized issues. Inclusion is based on currency denomination of a bond and not country of risk of the issuer. The Euro Aggregate is a component of other flagship indices, such as the multi-currency Global Aggregate Index and Pan-European Aggregate Index.” Source: Bloomberg Fixed Income Indices, Bloomberg. As of December 15, 2023.
“The Bloomberg MSCI US Green Bond Index aims to track fixed-income securities in which the proceeds, or an equivalent amount, will be applied to projects or activities that promote climate or other environmental sustainability purposes (Green Bonds). An independent research-driven methodology created by MSCI ESG Research, called the MSCI Green Bond and Green Loan Assessment Methodology, is used to evaluate index-eligible green bonds. The index excludes issuers with a “Red” MSCI ESG Controversy Flag and negatively screens issuers that have business activities related to certain controversial weapons, or that derive 15% or more revenue from thermal coal mining. Unlike the Bloomberg Global Aggregate Index, the Bloomberg MSCI US Green Bond Index does not have a minimum time to maturity of one year. Instead, the Index will hold bonds until final maturity.” Source: Bloomberg MSCI ESG Fixed Income Indices, Bloomberg. As of July 30, 2024.
“The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, fixedrate agency MBS, ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate-eligible securities also contribute to the multi-currency Global Aggregate Index and the US Universal Index.” Source: Bloomberg Fixed Income Indices, Bloomberg. As of December 15, 2023.
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