The Ascent of Green Bonds

Around the Curve

The Ascent of Green Bonds

Bonds that meet environmental objectives are becoming increasingly popular.


Across the global economy, Environmental, Social, and Governance (ESG) factors are becoming more important and better integrated into the activities of governments, investment managers, plan sponsors, consultants, and industry. I’ve written on this topic earlier, most recently in Reflections on Meetings in Washington, D.C. In that post, I wrote about the growing attention leveled on ESG factors and, specifically, the acute awareness that environment and climate risks are receiving from both governments and companies. There are growing initiatives to arrest environmental deterioration; however, addressing these forces creates a cost. Increasingly, entities—whether they be sovereign, municipal, or corporate—have turned to green bonds in increasing numbers to finance climate-related initiatives.

A Brief Analytical Recap

In our analysis of ESG factors and their impact on sovereigns we found that governance is the more significant factor in explaining credit default swaps (CDS) and interest rate spreads; I’ve also discussed these spreads in prior ESG-related blogs. Our internal work has also shown a relationship between our ESG score for a country and the sovereign’s credit rating. Chart 1 also shows the negative relationship between a country’s CDS and its environmental risk score, which we charted for the 68 countries. This chart concludes that a favorable E risk ranking score correlates to a lower CDS, and likely implies a lower cost of debt. In our view, given the greater focus on climate risks, the significance of the E factor could increase within our analysis. The failure of countries to address environmental issues—such as deforestation, greenhouse gas emissions, and renewable energy generation—could first pose a reputational risk, and then broad structural changes as a result of climate change impact.

For example, over 200 investors issued a statement last year directing companies to eliminate deforestation from their production—including their supply chains—in the aftermath of the Amazon fires. This perception could negatively affect Brazilian assets in the short term. Deforestation in Indonesia and Malaysia led the European Union (EU) to stop importing palm oil to produce biofuels. Therefore, it’s a reasonable expectation that environmental factors may increasingly be reflected in asset prices.

As mentioned earlier, there is a statistical relationship between a country’s environmental ranking and its CDS, and the implied impact on its borrowing costs. The demands of the marketplace will pressure governments, among other actors, to address the environment. The prospect of higher cost of debt may be enough to compel issuers to address environmental issues. Green bonds represent a financing vehicle to pursue climate mitigation policies, reduce a country’s carbon footprint, and invest in renewable sources of electricity generation.


Sources: Bloomberg, Verisk Maplecroft, Brandywine Global. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

A Simple Definition

Simplistically, the bonds are “green” because their proceeds support a variety of environmental projects or goals. The issuer attests that these funds will go to support green projects. That’s the message in Chart 2. The growth of green bond issuance has been nothing short of breathtaking, going from virtually zero to over a trillion dollars. But this includes all issuers, like asset-backed bonds, corporations, local government, and sovereigns—just to name a few (see Chart 2 and 3).

Sources: Verisk Maplecroft, Climate Bond initiative. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.



Source: Climate Bond Initiative. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The proceeds of these bonds can be used for a variety of environmental purposes. By far the largest usage of these funds is on renewable sources of energy investment, although other areas of green project investments continue to grow. Waste and water management are being addressed with these funds, and green transportation projects are also beneficiaries.

The Paris Agreement Momentum

The green bond market is still relatively young and despite the phenomenal growth, these bonds comprise a relatively small part of the total bond market capitalization. The European Investment Bank (EIB) issued the first green bond back in 2007—and to this day—remains a sizeable issuer of green bonds, with the funds directed to renewable energy and projects designed to improve energy efficiency. The EIB bonds are denominated in different currencies. Over the years the number of issuers has continued to increase, as entities focus on climate change impacts and ways to address the negative spillovers. The market continues to grow because of the increasing demand for such bonds by investors. The Paris Agreement is an important driver for further growth of such bonds, especially by sovereigns. The goal of the Paris Agreement is to address climate change and pursue actions that limit the increase in global average temperature to 2°C above pre-industrial levels this century, with the goal of a 1.5°C rise in temperature.

The desired aim is to shift to a carbon-neutral global economy. Many countries have promised to eventually hit zero carbon emissions, as they shift energy generation away from fossil fuels and toward renewable sources of electricity. The UN has indicated that 60 countries have such a goal and include France, Germany, and the U.K; however, the largest producers of carbon emissions do not have such a goal, including China and the U.S. Green bonds seem to be an ideal source of funding for governments to meet these climate change-related goals. Yet, there has not been a stampede of sovereign issuers. Part of the problem may be the lack of a universal definition outlining what a green bond is and what entity or institution would certify that a bond is green.

Presently, the Climate Bonds Initiative (CBI) and the ICMA’s Green Bond Principle can be used by an issuer to certify that a bond is green. The largest issuers of green bonds can be found in the U.S, China, and France, as shown in Chart 4. Emerging markets would also benefit from issuing green bonds to support climate mitigation efforts. Why countries have not embraced these bonds in greater numbers is not clear. The investor demand is certainly there, given the oversubscribed Chilean green bond issued recently. Fiscal space, or the lack thereof, could be constraining these governments.

Source: Climate Bond Initiative. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


Sovereign issuance, as shown in Chart 4, has begun to accelerate with countries increasingly recognizing this source of funding. Some of that issuance will come from countries that have already tapped into green bonds, like France, Poland, and Chile. The European Green Deal could give incentive to countries to issue green bonds to fund their climate initiatives. This European effort pledges to address energy production, building renovation to improve energy efficiency, and produce environmentally cleaner modes of transportation. Emerging markets are disproportionately affected by climate conditions, which could be a good market for them to tap in orders. Poland, for example, is criticized for its use of coal to produce electricity. About 80% of Poland’s electricity is produced from coal. Under the auspices of the EU, the Polish government has promised to increase its investment in renewable sources of energy and importing cleaner sources of energy. As a bondholder of Poland’s regular sovereign debt, we think this is constructive for the country in the longer-term. Poland was the first sovereign government to issue a green bond in 2016 and has come to market on three different occasions, most recently in 2019. Chart 5 shows the price movement for Poland’s recently issued 30-year green bond, with a 2% coupon. This green bond paid the same coupon as the regular sovereigns and carried the same credit ratings. The price movement shows solid investor interest, as well as Poland’s efforts to reduce its carbon emissions.

Source: Bloomberg. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.



While this blog only touches the surface of sovereigns in the green bond universe, there are some preliminary observations we can make:

Environmental issues are garnering increased attention and a country’s approach to the environment and related risks can affect its CDS, how much it pays for debt, and even future economic growth;

Green market bond capitalization will continue to grow and sovereign issuers will increasingly utilize this market; and,

Investors will continue to have a strong appetite for these assets.

As new issuance continues to grow, we along with the broader industry, will need to contend with certification, reporting, the return premium, market liquidity, and any portfolio diversification benefits that may accrue from including sovereign green bonds in a portfolio.




UN Principles for Responsible Investment (PRI, UNPRI) are a set of six principles that provide a global standard for responsible investing as it relates to environmental, social and corporate governance (ESG) factors.

The European Green Deal is a set of policy initiatives brought forward by the European Commission with the overarching aim of making Europe climate neutral in 2050.

A credit default swap (CDS) is designed to transfer the credit exposure of fixed income products between parties.

A spread is the difference in yield between two different types of fixed income securities with similar maturities.

The European Union (EU) is an economic and political union established in 1993 by members of the European Community. The EU now comprises 28 countries after its expansion to include numerous Central and Eastern European nations.

An asset-backed security is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities.

The European Investment Bank (EIB) is the European Union's nonprofit long-term lending institution established in 1958 under the Treaty of Rome.

The “Paris Agreement” refers to the 2015 United Nations Climate Change Conference, COP 21 or CMP 11 was held in Paris, France, from 30 November to 12 December 2015. It was the 21st yearly session of the Conference of the Parties (COP) to the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and the 11th session of the Meeting of the Parties (CMP) to the 1997 Kyoto Protocol.

The Climate Bonds Initiative is an international organisation working solely to mobilize the largest capital market of all, the $100 trillion bond market, for climate change solutions.

The International Capital Markets Association (ICMA) represents a broad range of capital market interests including banks, asset managers, exchanges, central banks, law firms and other professional advisers. It aims to sustain and supports its members’ business by promoting the development and efficient functioning of the global capital markets.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.


Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (109) Jin Guan Tou Gu Xin Zi Di 016; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

U.S. Treasury Inflation Protected Securities (“TIPS”) are bonds that receive a fixed, stated rate of return, but they also increase their principal by the changes in the CPI-U (the non-seasonally adjusted U.S. city average of the all-item consumer price index for all urban consumers, published by the Bureau of Labor Statistics). TIPS, like most fixed income instruments with long maturities, are subject to price risk.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.