Assets in green bond funds grow 11x during past decade
Assets in global sustainable bond funds have grown 11 times over the past decade, it has emerged, reaching $516 billion at the end of 2022.
Green bond funds are the most mature segment of this cohort, both in size and length of track record, but have so far had mixed fortunes, with significant underperformance in 2022 owing largely to their longer duration than traditional peers, according to a new Morningstar report.
Its research looked at the growth of the broader sustainable bond fund universe and focuses on funds that aim to achieve a positive impact by investing in the growing asset class of green, social, sustainability, sustainability-linked, and transition (GSS+) bonds.
“Up until 2022, green bond funds experienced a relatively sanguine period of positive returns and low volatility compared to conventional bond products," explained Mara Dobrescu, director of fixed income strategies at Morningstar.
"That relationship flipped, however, last year, as green bond funds experienced steeper losses and higher volatility in 2022, due to the longer average duration of the green bond space."
Net inflows into global sustainable bond funds slowed down in 2022 but remained positive, while traditional bond funds experienced massive outflows in the challenging market environment.
Moreover, ESG fixed-income fund assets are predominantly domiciled in Europe, which comprises nearly 90% of all assets. This is higher than Europe's share (83%) of the overall sustainable fund market.
Also, growing interest in sustainable and impact investing has encouraged more fund managers to launch suitable fixed-income products. Global product development has accelerated since 2019, reaching an all-time high in 2021 with 115 new fund launches.
56% of sustainable bond funds in Morningstar's database carry a Morningstar Sustainability Rating of 4 or 5 Morningstar globes, suggesting that their sustainability features are credible. Of funds specializing in GSS+ bonds, that number is 83%.
Social bonds, earmarked to finance social projects, are still in their infancy (accounting for roughly 20% of the GSS+ bond market), and are only targeted by a niche group of funds (12 identified funds in Morningstar's database, of which few have a sufficiently long track-record to be meaningful).
Sustainability-linked bonds (SLBs) account for less than 10% of the GSS+ universe. This new type of bond structure applies a penalty (usually a coupon step-up) if the issuer fails to meet specific ESG goals.
While initially touted as the "next big thing" in impact investing, SLBs have not achieved widespread use by impact bond fund managers.