Dispersion of the premium paid in the secondary market for green bonds (the “greenium”) has also increased, reflecting shifting supply and demand.
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.
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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