04 May 2021
04 May 2021
If more evidence of the extraordinary pace of climate change was needed, 2020 provided it in abundance. Arctic sea ice coverage matched 2016 for the lowest amount on record. Global temperatures were the second hottest ever, pushing 2019 down to third place. Meanwhile, satellite data revealed that CO2 concentrations continued to rise despite the pandemic, reaching a global level not seen for up to 5 million years.1
Yet for all the alarming statistics on global warming, humanity still has a major opportunity to limit climate change before it’s too late. Scientific research has yielded +1.5°C as the point after which there would be a significant negative impact on the environment and climate patterns. That’s why this target was codified in the Paris Agreement in 2015.
“Scientists agree that to get on track to limit global temperature rise to 1.5°C, emissions must drop rapidly to 25 gigatons by 2030,” says the UN Environment Programme. “Our challenge: based on today’s commitments, emissions are on track to reach 56 Gt CO2e by 2030.”
We’ve written several times in the past about green bonds – the impact-driven fixed income investments that have a major role to play in the climate transition. If you’d like a refresher, please see our previous blogs here and here. For now, it’s just worth remembering that green bonds were created to directly fund projects with positive environmental or climate benefits.
If commitments, policies and action can deliver a 7.6% emissions reduction every year between 2020 and 2030, we CAN limit global warming to 1.5°C. This figure is our global solution.UN Environment Programme
Green bonds are still a small part of the bond market, but they are growing fast. As we will explore in this blog, the rationale for including green bonds in portfolios is stronger today than ever. Read on to learn more about the green bond market and how our flagship green bond ETF performed in 2020. And imagine what could happen if we shifted the trillions in debt markets to greener investments.
A $1 trillion market for truly green finance
In December 2020, the green bond market crossed an important psychological threshold: $1 trillion of cumulative issuance since 2007, when the market was created. Issuance in 2020 alone was a record $290bn, according to the Climate Bonds Initiative (CBI)2 , a not-for profit which aims to mobilise the bond market for climate change solutions. At the time of writing in 2021, cumulative issuance stands at $1.2 trillion and 2021 issuance at $124bn.3
As you can see from the CBI green bond score card (opposite), green bond issuance actually grew by 9% in 2020, despite the turbulence caused by Covid-19. Even though many green bond issues went ‘on pause’ at the height of the crisis, that pause created a backlog of green bond projects, which flooded into the market in the best-ever Q3 for green bonds.
Total sovereign issuers after Egypt, Germany, Hungary and Sweden issued debut green bonds in 2020
Proportion of new issuance from Europe last year – the #1 source
USA, Germany, France
The top 3 issuers of green bonds in 2020
Source: CBI Global State of the Market, 2020, https://www.climatebonds.net/resources/reports/sustainable-debt-global-state-market-2020
To learn more about the growth of the green bond market, and how green bonds can be used in a fixed income portfolio, read our latest Expert’s View.
How investors can make an impact with green bonds
The stats above suggest that green bonds are becoming more popular with investors. But how do they work?
The simplest way for us to illustrate the power of green bonds is to use our own flagship green bond ETF (Bloomberg ticker: CLIM) as an example. We’ve crunched the data (full report here), and this should give an idea of what investors can achieve with a green bond investment, and the vast impact we could have together if we successfully “shift the trillions”.
It’s important to remember that most green bonds are based on the “use of proceeds” principle. This means that the funds raised (the proceeds) are earmarked to finance specific green projects (the use). UoP makes a green bond ETF a great choice to take direct climate action in a simple way, with the guarantee that your money goes to pro-environment projects.
In 2020, the top three sectors that received proceeds from the Lyxor Green Bond (DR) UCITS ETF were Energy (45%), Green Buildings (24%) and Clean Transport (19%).4
Impact indicators for the Lyxor Green Bond (DR) UCITS ETF
In 2020, even the relatively modest €550m invested in our green bond ETF achieved some amazing results in these sectors. As you can see below, 438k tonnes of CO2 equivalent emissions were avoided – that’s like taking nearly 95,000 passenger cars off the road for a year.** Enough renewable energy was funded to power nearly 28,000 homes,** and water was treated that would fill 16 Olympic-sized swimming pools.5
We are delighted that our investors made such a huge impact with our ETF in 2020.
Investors also supported 7 out of the 17 UN Sustainable Development Goals (SDGs), which aim to eradicate poverty, fight inequality and tackle climate change. Each goal has specific targets to be achieved by 2030, and project-oriented green bonds are uniquely placed to directly invest in the different objectives of the SDGs.
Exposure to UN Sustainable Development Goals by portfolio weight
Watch ‘The impact of CLIM in 2020’ to see how our Green Bond ETF made a difference
Example project: E.ON case study
Here you can see a focus on two green bonds issued by E.ON and held by the ETF. Each issue avoided around 2,980,000 tonnes of CO2 equivalent. For a full selection of case studies and to understand our methodology, please read our full impact report here.
Take direct climate action with the Lyxor Green Bond ETF
We strongly believe that green bonds are a powerful tool for making a climate and/or environmental impact with your investments.
In a recent UK poll, 77% of respondents considered climate change an important risk. But only 15% were investing for a greener, fairer society themselves6. If you are one of them, a green bond ETF might help realign your portfolio with your philosophy.
Our flagship Green Bond ETF…
…supports direct climate action with more than €500m in assets.
…invests in over 400 green bonds approved by the Climate Bonds Initiative, ensuring each one adheres to the Green Bond Principles
…is the first and largest global green bond ETF and first to receive the Greenfin label
…and complies with Article 9 of the EU’s Sustainable Finance Disclosure Regulation (SFDR).
We also offer an ESG-screened version (Bloomberg ticker: XCO2) that applies an additional issuer-level sustainability screen, excluding those involved in fossil fuels or nuclear power.
Our green bond ETFs at a glance
We believe that green bonds are a crucial part of the climate transition and we’re fully behind the campaign to #shiftthetrillions in debt markets into green investments. You’ve seen what a positive impact can be achieved at a (relatively) small scale. Now imagine what more we could achieve if the vast potential of the bond market shifted to green investments!
Please get in touch if you’d like to learn more, or visit our ESG Hub to explore Lyxor’s ESG and climate range. In the meantime, here is the full list of Lyxor green bond ETFs:
4Source: Lyxor Asset Management, March 2021
5Analysis by Lyxor Asset Management, March 2021. **These indicators concern 47% of the portfolio weight. Source of the conversion tool: https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator
This article is for informative purposes only, and should not be taken as investment advice. Lyxor ETF does not in any way endorse or promote the companies mentioned in this article. Capital at risk. Please read our Risk Warning below.
This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2014/65/EU. These products comply with the UCITS Directive (2009/65/EC). Société Générale and Lyxor International Asset Management (LIAM) recommend that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on www.lyxoretf.com, and upon request to firstname.lastname@example.org.
Except for the United-Kingdom, where this communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658, this communication is issued by Lyxor International Asset Management (LIAM), a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2014/91/EU) and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority).
The products mentioned are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them. Updated composition of the product’s investment portfolio is available on www.lyxoretf.com. In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed.
Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document is of a commercial nature and not of a regulatory nature. This material is of a commercial nature and not a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.
Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website www.lyxoretf.com/compliance.
Conflicts of interest
This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.