Impact Blog
Green bonds and the broad bond market: Compare and contrast - Part 1

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      By Andrew GoodaleInstitutional Portfolio Manager, Eaton Vance Management

      Boston - The market for green bonds - debt issued by governments, banks, local governments and corporations to finance climate change solutions - is growing rapidly. Issuance for green bonds and loans in 2019 was slightly over $250 billion, a number that is forecast to grow to $350 billion to $400 billion this year.1

      But how closely does the green bond market resemble the overall bond market? More specifically, how do the industry-leading green bond indexes stack up to a broad-based bond market index, such as the Bloomberg Barclays U.S. Aggregate Bond Index (U.S. Aggregate)?

      The answer: There are a number of structural differences across market size, issuers, sector diversification, and key types of risk, including currency. Given these differences, we think risk mitigation and an active approach are paramount in green bond portfolio construction.

      A narrower universe

      For starters, the green bond universe, at fewer than 500 issues, is tiny compared with over 11,000 for the U.S. Aggregate. In addition, because Europe still has the most established pool of dedicated green bonds, EUR-denominated bonds far outnumber those denominated in US dollars (USD).


      Distinct sector differences

      Sector diversification also contrasts to the broader market, with corporates and government-related bonds making up the vast majority of the green bond indexes. In contrast, securitized assets, which compose 28% of the U.S. Aggregate, constitute only 1% of the Bloomberg Barclays MSCI Green Bond Index2 and none of the ICE BofAML Green Bond Index.


      The data suggest that some of the existing structural issues within the green bond market will fade over time as it continues its rapid ascent, with US dollar issuance growing, and as green bond index providers consider the potential inclusion of green mortgage-backed securities.3 As the industry evolves and grows, however, we believe active evaluation of issuers, use of proceeds, and credit analysis for this unique sector remain essential.

      Bottom line: There are a unique range of considerations around issuers, structure and markets when constructing a green bond portfolio versus one more reflective of the broader bond market, highlighting the value of an active, risk-focused management approach.