While green bonds are a growing market and moving in the right direction, they currently fail to provide enough diversification, according to Western Asset Management.
Speaking at the Morningstar Investment Conference, Western Asset Management’s global head of environmental, social and governance (ESG) investments and portfolio manager, Bonnie Wongtrakool, said there were only a few sectors currently that issued green bonds.
“These include the utility sector, real estate, and multi-lateral super nationals issuers and we’re starting to see more financial institutions issue. But that only started to broaden recently. Now we’re seeing consumer cyclicals starting to issue as well,” she said.
Another weakness, she said, was much issuance was in euro rather than US dollar so it was difficult for investors looking to manage a US dollar portfolio.
“But this year we’ve seen USD issuance exceed euro issuance so these few things seem like they’re being addressed. Similarly with credit quality they tend to be investment grade whereas now we’re starting to see high yield,” Wongtrakool said.
“All those issues are being worked out for green bonds and ESG bonds which include social bonds and sustainability bonds. All these forces are moving in the right direction for them to play a very good role in an investor’s portfolio.
“We do believe the market will grow due to the various demand for these types of products. In the wake of COVID-19 lots of sovereigns that are building infrastructure plans around environmental projects and we’ve seen that in the EU that they have plans to issue a lot of green bonds over the next few years and that’s going to supply a lot to the market.
“We’d like to see more in EMs where there’s more work to be done but there will be a lot of good investment opportunities by sovereigns to issue green bonds.”
