The dual advantage of high-income green bonds

We spoke with Portfolio Manager Evert Giesen (EG), Client Portfolio Manager Meena Santhosh (MS), and Green Bond Analyst Gino Beteta Vejarano (GV) to gain insight into the strategy’s rationale, its unique characteristics, and the opportunities that exist in the green bond market.

GV: ‘Green bonds play a crucial role in linking capital markets to environmental financing, funding half of this year’s energy transition efforts. The green bond market is expanding quickly, with sales reaching USD 356 bln in the first half of 2024, making it the busiest six-month period in history. This was driven by issuance from SSAs (sovereigns, supranationals, and agencies), corporates, and emerging markets. In particular, green bond sales in emerging markets have risen nearly 50% year-to-date, highlighting the region’s growing role in sustainable finance. This growth is reflected in the increase of subordinated and green bond issuance, surpassing levels from 2022-2023.’

EG: ‘In our high-income green bond strategy, we refer to the ‘5B’ part of the credit market, which focuses on bonds with BB and BBB ratings. By combining investment grade and high yield bonds, we target a balance of moderate risk and attractive income. This approach allows us to capture the higher yields associated with these lower-rated bonds.’

‘We diversify across emerging and developed markets and invest in green corporate hybrids and subordinated green bonds from financial institutions. These segments are growing rapidly within the green bond universe, providing a broad selection of more than 1,500 bonds issued by over 500 issuers globally. Our broader credit strategies, like global high yield and investment grade, also invest in green bonds, allowing us to leverage those opportunities within this strategy.’

GV: ‘This strategy leverages two core strengths of Robeco: first, our extensive expertise in managing credit strategies, and second, our proprietary five-step process for selecting the most impactful green bonds.’

‘Being an Article 9 strategy, we can deliver both strong financial returns and measurable sustainability impact. From our research, we’ve found that green bonds from carbon-intensive sectors – like energy, utilities, and materials – demonstrate the highest avoided emission metrics per million euros invested. This is particularly significant in emerging markets, where companies tend to rely more on carbon-intensive activities. This combination offers greater potential for decarbonization through targeted investments.’

MS: ‘Not at all. There’s a difference between a niche product and one with a strong unique selling proposition (USP). A niche product typically caters to a small, specific use case or a narrow client segment, whereas this strategy has broader applicability.’

‘We believe the product is timely and well positioned in the current market environment. As we enter a policy easing environment, yields on risk-free assets (e.g. Treasuries, Bunds etc.) decline and investors will look to increasingly seek higher returns from alternative sources. Furthermore, the sustainability landscape has evolved to be more transition-focused, with a growing focus on companies at the beginning of their decarbonization journeys thereby benefiting from strong growth and higher returns. As such, the strategy’s strong USP is driven by perfect alignment with these dual objectives: delivering income while supporting sustainability.’

EG: ‘In a volatile market, this strategy is a great fit because it focuses on segments of the market that present attractive opportunities, even amid uncertainty. For instance, US dollar denominated bonds in emerging markets offer some of the most compelling yields, as they provide high spreads over Treasuries. Corporate hybrids in the Euro market also offer attractive yields currently around 5%. The current Goldilocks scenario of stable economic growth, especially in the US, further supports the strategy’s positive outlook.’

‘In a portfolio where the average spread is around 200 basis points, these higher-yielding assets offer a significant income boost in a diversified manner. As well as capturing yield opportunities, a benchmark-agnostic approach allows full flexibility to navigate market volatility through careful selection of securities with attractive risk-adjusted returns. If economic conditions worsen, we can reduce high yield exposure and increase investment grade allocations, maintaining a stable income stream. This ability to switch between asset classes is a key strength in navigating different market environments.’

MS: ‘In addition, the strategy benefits from long-term structural drivers as well as changes in market cycles that investors are typically tuned into. A rapidly evolving geopolitical landscape and a technological revolution – stemming from emerging markets in particular – will keep yields elevated for some time.’

‘Within the sustainability landscape, net-zero commitments remain a long-term goal, expected to last for decades, and this will continue to fuel the appetite for green bonds. This strategy is a versatile investment tool for a range of clients. It’s designed to meet the ongoing demand for income and is equally suitable for investors at the start of their sustainability journey – whether it’s to align themselves to regulation or target investments that have a positive impact.’