Dispersion is an active manager’s best friend. For sustainably focussed fixed income funds, dispersion can take the form of both financial valuations, as well as the varied sustainability impact of different investment vehicles and issuers. There is currently a high degree of dispersion in the labelled green bond market with regards to green bond framework quality, whilst significantly less dispersion was evident in 2021 credit valuations.
Credit valuation dispersion (BBB corporate bonds)1
Credit valuation dispersion (BBB corporate bonds)
At the start of 2022, dispersion within credit markets, including green bonds, was tight. However, the Russia-Ukraine war and global supply chain problems have subsequently created a more challenging backdrop, while tightening financial conditions and growing risks of policy error provide for an uncertain outlook. With investors consequently taking a more discerning approach to credit selection, this brings opportunities. Credit spreads have increased along with levels of dispersions in green bond markets.

Dispersion of the premium paid in the secondary market for green bonds (the “greenium”) has also increased, reflecting shifting supply and demand.
Estimated greenium dispersion widening2
Estimated greenium dispersion widening
Amidst tightening financial conditions, we would expect green bonds to continue to gain market share but overall issuance volumes to remain constrained, while demand should continue to rise, buoyed by supportive regulatory and industry commitments to environmental challenges. However, the widening dispersion in greenium is suggestive of a more discerning investor base in the face of selling pressure. Currently the data set for analysing the level and dispersion of greeniums is limited so we should be wary of drawing too strong a conclusion. However, as industry standards for green bonds start to ratchet up over the next 12 months, we are wary of the effects of growing greenium dispersion and continue to emphasise the merits of internal green bond verification processes.

The largest contribution to credit valuation dispersion within green corporate bond markets comes from the real estate sector, presenting a conundrum for investors as it arguably has the highest degree of dispersion in terms of green bond framework quality. Typical property green bonds take a light touch approach to the greenness of the “use-of-proceeds” within their green bond frameworks, often falling back on building certification levels that are unambitious. Alternatively, the certification itself may be unreliable as a proxy for real world environmental impact. We are encouraged by moves to harmonise certifications and the shift away from design phase certification to operational emissions and reporting that captures emissions footprints per square metre. Criteria such as the Climate Bonds Initiative building criteria are helpful, although we feel the EU Taxonomy’s watered- down version will leave investors with work to do to discern which property green bonds are consistent with their environmental objectives.

The real estate sector faces myriad structural headwinds, now compounded by the cyclical impact of a rising interest rate environment – this is why credit valuations are weaker than similarly rated bonds. This provides opportunities for credit investors willing to take a long-term view on company fundamentals and focus on those green bond issues whose frameworks are more consistent with our environmental objectives.
1Source: Jupiter, Bloomberg 22.04.22. Dispersion as measured by the difference between 20th and 80th percentile credit spreads of BBB rated bonds within the BAML Green Bond Index and the BAML Global Corporate Index.
2 Source: Jupiter, Bloomberg 22.04.22. We used a matched pair approach to calculate 6 month MA of greenium in the secondary market.

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