Finance, Society and the Environment
Edited by Sabri Boubaker, Douglas Cumming and Duc K. Nguyen
chapter 14: Asset allocation and the green bond market
The chapter reviews the development of the green bond market and discusses the investment implications. The supranational organizations were the first issuers of green bonds. The introduction of Green Bond Principles and strong policy support in developing countries contributed to an increase in the issuance of green bonds. Corporations, banks and municipalities have become active issuers. Demand has increased as well, as investors with environmental focus raised allocation in this asset category. The common motive to invest in green bonds is to support the climate. The chapter discusses an additional financial incentive. Adding green bonds to a portfolio produces benefits from diversification if correlations are not perfectly positive. Furthermore, the chapter examines the performance and correlations of the four green bond indices. The best performance was in the first quarter of 2016 and losses were seen in 2013 and 2015. The results also showed that, within the green bond market, it is not efficient to invest in both S & P and BoA Merrill Lynch index-based funds, as those two indices are highly correlated and the diversification benefits are limited.
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