31 March 2020

The Green Bonds market is no longer black and white

The coming decade of transition could reshape how debt finances the low-carbon world

The challenge facing society has rarely been more clear-cut as we head into a new decade. At AXA Investment Managers, we believe that climate change will be a defining theme of the next ten years and financial institutions must be ready to lead or prepare to be laggards.

For insurers the challenge is two-fold. First, they must address the impact of 'Green Swans' – unpredictable climate events that can damage public and private infrastructure. Second, their investments may be contributing to climate change, and risk being devalued if the low-carbon economy leaves them behind.

We believe this will be a decade where leadership pays. That's why we have embraced Green Bonds – debt designed to finance projects that deliver a positive climate impact. Bond proceeds are set aside for eco-friendly investments, but returns are backed by the issuer as a whole. It's little surprise the sector has drawn sustained interest from insurers.

The Green Bonds market – skewed towards investment-grade, euro-denominated debt – passed the €500 billion mark in 2018. Momentum has continued from some of the world's biggest names[1]. Apple priced its first EUR Green Bonds in November, seeking €2 billion for more energy efficient products and reduced emissions at suppliers [2] . And insurers are issuers as well as investors: in September we saw the first by a European insurance firm, as Generali raised €750 million.

We have built capability in this area because we believe Green Bonds are an excellent tool for investors who want a transparent solution to support a low-carbon economy without sacrificing financial returns.

The trend is positive, but it is also constrained. The chart below shows Green Bond issuance is strong and accelerating – up 49% in 2019 – but it is still dwarfed by the wider corporate bond market. In a single record week in September, global issuance of corporate bonds topped $140 billion [3] more than half of the Green Bonds total for the entire year ($258 billion).[4]

 Source: Climate Bonds initiative, February 2020Given how important it is to retain the purity of the eco-friendly rationale for Green Bonds, this leaves a gap in the market during what will be a decade of transition.

The low-carbon economy will require not only exciting innovations from start-ups, but also concerted efforts by the incumbent, carbon-intensive businesses that have powered our industrial age. It is vital that they join the journey, and that is why we have taken a lead and proposed a new form of debt: Transition Bonds.

It's not good enough to simply focus on the green end of the spectrum, or the brown part for that matter. We think investors should look at how the global economy moves from one to the other. In 2019 we issued a call to action to establish this new asset class and then devised a set of guidelines that allowed us to deliver a Transition Bond in a private placement on behalf of AXA Group. This funded €100 million of loans made to initiatives in carbon-intensive sectors by Credit Agricole. They estimate the underlying projects should abate carbon emissions by about 26,500t CO₂ annually.

Our innovation continues in climate scenario analysis. AXA IM has been working with AXA Group and fellow investors to develop advanced methodologies aimed at testing whether a portfolio can be consistent with a temperature increase of ≤1.5° as called for under the Paris Agreement. We have established that this is a viable and valuable goal – more refinement and research will follow.

All of this is taking place in a context of steadily increasing regulatory pressure. In the UK for example, the UK Prudential Regulatory Authority wants evidence that insurers are working to manage climate risks and reduce their potential impact, while designating senior managers to take on responsibility for that [5]. Measures are being put in place across Europe [6]

This underscores the importance of engagement and stewardship in fixed income – whether Green Bonds or conventional – another area where AXA IM seeks market leadership. We toughened our oversight of issuers' climate policies in 2019, with 40% of engagements focused on the topic.

And that taps in to one of the key themes in the coming decade. Whether it is participating in the rise of Green Bonds and Transition Bonds, pursuing in-depth climate analysis of portfolios or driving best practice at issuers, it is by working together at the forefront of the low-carbon transition that leading investors, asset managers and companies can deliver change – while shaping it to their mutual benefit.

For professional clients only. Not to be relied on by retail clients. This communication does not constitute an offer to buy or sell any AXA Investment Managers group of companies' product or service and should not be regarded as a solicitation, invitation or recommendation to enter into any investment transaction or any other form of planning. The views expressed do not constitute investment advice, do not necessarily represent the views of any company within the Group and may be subject to change without notice. Issued by AXA Investment Managers UK Limited, authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No: 01431068. Registered Office: 7 Newgate Street, London EC1A 7NX. © AXA Investment Managers 2020


1 - "Green bond market breaks half-a-trillion-dollar barrier" Environmental Finance 13 November, 2018

2 - "Apple raises €2bn in green bonds" Financial Times 8 November, 2019

3 - "Corporate bond issuance sets global record" Financial Times 6 September, 2019

4 - "Record 2019 GB Issuance $255bn!" Climate Bonds Initiative 16 January, 2019

5 - "Enhancing banks' and insurers' approaches to managing the financial risks from climate change" UK PRA Policy Statement PS11/19 April 2019

6 -  "ESG: France's Article 173: taking stock" IPE January 2019


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Andrew Douglas, Associate Director, Insurance
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