The year 2022 is being historic for fixed income . The rapid rise in rates carried out by central banks to combat inflation has caused a sharp adjustment in the price of all assets . In the case of bonds, the falls in prices are in double digits, comparable to those suffered by equities. Visit the specialized portal elEconomista Sustainable investment and ESG.
The green debt is not exempt, far from it, from these declines . The global green bond index, the Bloomberg MSCI Global Green Bond , sank, by price, 29%, and the Bloomberg MSCI Global Aggregate Sustainability , which includes a broader basket of sustainable debt, fell 22.3%; hence not a single sustainable bond fund is spared losses in 2022.
If we focus on green bonds, the collapse in their price has triggered their yield to its historical maximum, above 4.1% (in fixed income, price falls translate into increases in profitability). A global basket of global green bonds already outperforms a similar basket of vanilla bonds (which is at 3.8%), an outlier, which had not happened until 2022 (green bond data starts in 2014, year in which the first issues of this type were made).
Myths that collapse
In this abnormal market scenario, several myths have collapsed, such as that fixed income is fixed , or that financing with green bonds is cheaper for issuers than doing it with traditional debt. Currently, investors are not necessarily willing to give up some of the return just because the bond is green.
“Investors, in times of stability, are willing to pay a little more for the ‘green’, but now they know that they will be able to buy cheaper in a few days,” explains Julián Romero (Ofiso).
In the first half of 2022, only 20% of global green bond issuances achieved a greenium ( green premium ). In other words, only in 2 out of 10 placements did investors pay a price premium due to the fact that the bond was green and not traditional. This is revealed by a study by the Climate Bonds Initiative (CBI), a reference organization in this type of issue, which analyzed the conditions in which 50 non-sovereign placements were carried out around the world between January and June of this year.
“It is not that green bonds are worth less now,” clarifies Julián Romero, president of Ofiso, the Spanish Observatory of Sustainable Financing. “What happens is that investors, in times of stability, are willing to pay a little more for the green bond, but now they know that they will be able to buy [that same green bond] cheaper in a few days, and they adjust to the market,” he explains. In addition, the reduction of the greenium also contributes to another important factor that greatly affects the primary market, adds Romero: ” The central banks are withdrawing the bond repurchase programs, so that an important part of the demand has disappeared.”
This expert emphasizes that, once the market stabilizes and volatility is reduced, “the greenium will probably come back” .
Regarding the profitability offered by the green debt, the president of Ofiso warns that, with that 4.1%, this asset offers a clear buying opportunity , since this situation will not last: as the markets normalize , this yield should tend to equal or be below that of conventional bonds.
As CBI analysts explain in the report Green bond pricing in the primary market for the first half of 2022, “the relatively low incidence of greenium in the first half of the year is not bad news for the green bond market in but rather reflects an exercise of extreme caution by investors, due to geopolitical and macroeconomic uncertainty”.
Despite everything, the demand for this type of issue continued to exceed supply, according to this study. Green bond placements in euros reached an oversubscription of 3.1 times , compared to 2.4 times for their vanilla equivalents . Hence, green bonds managed to narrow the spread by 18.2 basis points (during the pricing process) and conventional bonds did so by somewhat less, 16.4 basis points.
“The rate hikes (…) plagued the market with anecdotes of issuers canceling their issues at the last minute,” according to the CBI
In the case of placements in dollars, the average demand for green bonds was 3.8 times higher than the supply, compared to 2.7 times for their conventional counterparts. And the spread was 29.3 basis points for green, and 22.5 points for vanilla . Read also: Sustainable bonds are today more ‘appetizing’ after falls.
The largest oversubscription in the first half of the year was received by an issue of KfW -the State Development Bank of the Federal Republic of Germany-, with an issue of 3,000 million euros over 10 years that received requests for 34,000 million (11, 3 times more). It is not a historical record: the highest oversubscription, with data from 2016, is held by Prologis, with 14 times, and it cannot be forgotten that the issuance of the first green bond of the Kingdom of Spain in September 2021 received requests for 60,000 million, 12 times what is offered .
The volume of emissions also suffered in the first half of 2022 , a year marked by the war in Ukraine and the consequent energy crisis, which exacerbated inflation. “Rise rates and high volatility (…) plagued the market with anecdotes of issuers canceling placements at the last minute ,” reads the CBI report.