We expect the pace of Asian Green Bond issuance to accelerate in the coming quarters, leading to an expansion in the investment universe. Green Bonds not only provide Asian corporates with essential funding for infrastructure and environmentally friendly capital expenditures, they also provide investors with a wide range of yield choices and potential value resilience amid volatile markets.
This paper sought to construct an Asian corporate Green Bond universe to enable an unbiased comparison between the universe and traditional Asian corporate bond indices. We achieved this by extracting 79 eligible bonds from the ICE BofA Green Bond Index and the Bloomberg corporate bond universe.
Step 1: We first extracted Asian investment grade Green Bonds from the ICE BofA Green Bond Index. The ICE BofA Green Bond index contains 561 investment grade global Green Bonds of benchmark size, as defined by the Index according to currency denomination (e.g. US dollars minimum size is 250 million, euro is 250 million, British pound is 100 million, etc.). Of the 561 global issues, 78 are issued by Asian issuers. Of these,16 sovereign and quasi-sovereign issues were removed to allow comparison against traditional corporate indices. The extraction process resulted in a universe of 62 investment grade Asian corporate Green Bonds.
Step 2: We then added Asian high yield Green Bonds to make the comparison complete and informative. We sourced Asian high yield Green Bonds from the Bloomberg active corporate bond universe, which is one of the largest fixed income data bases in the world. We selected 17 bonds based on the following four criteria: a) Green Bond status; b) corporate bond; c) risk domiciled in Asia, and d) rated below investment grade by one of the three international rating agencies.
Step 3: We combined the 62 investment grade corporate Green Bonds with the 17 high yield corporate Green Bonds that we identified to form our Asian Corporate Green Bond universe of 79 bonds. We compared this universe against two traditional benchmark indices – the ICE BofA Asian USD Corporate Bond Index and the Credit Suisse Asian Corporate Bond Index.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is not a guide to future returns.
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.
^1 Source: https://www.climatebonds.net/files/reports/2019_annual_highlights-final.pdf, Feb. 2020.
^2 Source: https://www.brecorder.com/2020/01/20/563003/green-bond-issuance-hitrecord-255-billion-last-year/, Jan. 20, 2020.
^3 Green Bonds were included in accordance with the minimum size requirements of the ICE BofA Green Bond Index benchmark definition.
^4 Sources: BofA Green Bond Index, ICE BofA Asian Corporate Bond Index, data from March 1, 2020 to April 30, 2020.