Practical Applications of Allocating to Green Bonds

Abstract

In <b><i>Allocating to Green Bonds</i></b>, from the Summer 2022 issue of <b><i>The Journal of Alternative Investments,</i></b><b>Laurens Swinkels</b> of <b>Robeco Institutional Asset Management</b> and <b>Erasmus University</b> addresses the question of where green bonds fit in fixed-income portfolios. He first examines the growth in assets and characteristics of the Bank of America’s Green Bond Index (GREN) over time to understand if such qualities are static or changing and which historical returns might be representative of future returns. His analysis covers only returns since 2015 because of the changes to the index over time. He compares the historical returns and features of the GREN to six other traditional global- and euro-based bond indexes, where the features examined included credit rating, currency, sectors, and maturity. Swinkels concludes that investors could replace a traditional aggregate fixed-income allocation with green bonds without impacting a portfolio’s risk–return profile. His asset pricing tests indicate that default and term spreads are major drivers of green bond returns.