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Nurture not Nature Determines Green Bond Premium with Corporate Debt ‘Twins’

June 4, 2020

The centuries old debate on whether it is primarily ‘nature,’ how a person is wired by their  genes, or ‘nurture, how you were brought up, that determines human behaviour has been applied in an analysis of green and brown corporate bond ‘twins’ by Insight Investment. The researchers found it is the quality of the ESG credentials of the parent issuer that is the main driver of outperformance by a company’s green bonds and there is no difference relative to brown, or less sustainably structured debt, emerging from the same corporate nest.

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The Insight Investment, part of BNY Mellon Investment Management, recent report: How Did European Sustainable Bond Investments Perform During Covid-19 Turmoill?, examined whether green bonds proved to be more resilient than their brown counterparts during the peak period of debt market volatility in the coronavirus crisis between March and April this year.

While some recent market analysis has referenced index performance to conclude green bonds have outperformed over the two months, the Insight researchers said this did not take into the account the quality, or sector, differences between these indices.

For its analysis, Insight Investment looked for maturity-matched pairs of bonds issued by the same company – one green, one brown – to determine if there were any differences in their performance and found that there was little evidence that the ESG-structured bonds systematically outperformed conventional equivalents.

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But they also concluded, that, as investors switch to more impact-focused metrics in their strategies, green bonds may offer a clearer premium – the so-called ‘greenium, pointing to the track record of the Insight Sustainable Euro Corporate Bond Fund, which was launched in September 2017, and outperformed its benchmark over the first four months of 2020, on both a one-year basis and since its creation.

The Fund aims to tilt its portfolio in favour of better-quality ESG issuers and has a higher hurdle to investing in climate-sensitive sectors, including the exclusion of polluting industries such as coal power generation.

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