The suitable financial instrument to secure financing for these projects is green and social bonds – or impact bonds - for which use of proceeds are clearly specified. These designated bonds fund projects that enable, for example, climate change adaptation and mitigation, protection of biodiversity and clean transportation.  

Stepping it up

This is already happening, but the current issuance is still falling short of what is needed to finance a future-proof economy. For example, reaching the current 2030 climate and energy targets set by the European Union will require additional investments of EUR 260 billion a year by 2030. A big number when compared to the total of outstanding green and social bonds. With EUR 27 billion outstanding, France is the biggest sovereign green issuer globally, followed by the Netherlands and Belgium, with almost EUR 9 billion and almost EUR 7 billion outstanding, respectively. Germany raised EUR 6.5 billion in September this year with its first green bond. A further bond issue is planned later this year. Also, Ireland, Poland and Sweden have issued green bonds. Austria, Spain and Italy consider issuing their first green bonds in 2020. 

One country that remains silent is the UK. For the UK to issue green bonds, Parliament would need to pass a bill that advises pension funds to take the climate into account, including the country’s pledge to cut greenhouse gas emissions to net zero by 2050. One can only wonder why this hasn’t happened yet. With the UK’s role as president of COP26 (which will take place in November 2021), it is time that the country starts to lead by example. Setting out a green recovery could start by issuing green bonds. In the market the call for a green Gilt is gaining traction. Earlier this month a report was published by the Green+ Gilt working group calling upon the UK Government to issue a green gilt. The proposal also includes an overview of categories that could be financed by the proceeds of the green gilt.

Rosl Veltmeijer, Portfolio Manager

I see four reasons why now is the perfect time for governments and regions to issue or increase their issuance of such bonds:   

  1. Due to the COVID-19 crisis, governments have a high borrowing need. This money is used to finance the enormous stimulus programmes that governments have announced to support businesses and sectors.  
  2. By issuing green or social bonds, governments clearly signal their country’s commitment to a greener and more inclusive economy. Currently, a vast majority of stimulus debt goes to the fossil fuel industry. Only a fraction of the money is spent on low-carbon industries including renewable energy. Issuing green or social bonds ensures that governments will spend this money wisely.
  3. The European Green Deal will increase the number of green projects that need finance. This ambitious deal includes a target to reach net zero emissions of greenhouse gases by 2050.
  4. Demand from investors is soaring. They, too, want to increase their environmental and social impact. According to Climate Bonds Initiative investors with USD 45 trillion of assets under management have made public commitment to climate and responsible investment. Despite the low yield environment, the recently green bond issued by Germany was oversubscribed five times.

How Triodos IM invests in green and social bonds

Triodos IM invests in sovereign, sub-sovereign and corporate bonds. We focus on corporate and sub-sovereign issuers that contribute to one or more of our transition themes. These bonds are complemented by carefully selected thematic green and social bonds issued by companies that meet our strict minimum standards.

We also invest in ‘vanilla’ sovereign bonds, as these are important to manage risk and liquidity of the fixed income portfolios. Contrary to what we can do when investing in corporate credits, as capital providers of sovereign institutions (‘vanilla’ sovereign bonds), we are not in the position to steer the use of proceeds nor can we influence the political agenda of the issuers. However, we do choose to direct our capital into sovereign and regionally issued green and social bonds. We are currently invested in green bonds issued by the Netherlands, Belgium, Ireland and France and regional bonds issued by Madrid and Flanders among others. Some have a green character, others a social, such as the first bond issued by Flanders, which is dedicated to affordable housing and accesss to education.

We strongly aim to increase our sovereign and regional exposure to green and social bonds and look forward to welcoming Germany in this market. We encourage governments and regions that have already issued green and social bonds to increase their efforts and issue more, and call on the UK to follow suit.  

Watch our BrightTALK webinar An Elephant in the Room for a discussion on the role that listed fixed income can play in scaling impact investments.

Visit the fund pages on our website for more information about our Impact Equities and Bond funds.