ESG: Green Bonds Gaining Traction

Mid Week Bond Update

ESG: Green Bonds Gaining Traction

With over $1 trillion issued so far, "Green Bonds" are becoming a major force in fixed income.

“Green bonds” now account for over $1 trillion1 of issued value, making the category an important – and often under-appreciated – sector of the global fixed income universe.

A bond is considered “green” if its proceeds are directed to support environmental projects or goals, including climate mitigation, reduction of an entity’s carbon footprint, investment in renewable sources of electricity generation, or related activities. An issuer can get a bond certified as green via the Climate Bond Initiative and the ICMA’s Green Bond Principle. So far, the largest issuers of green bonds are in the U.S., China and France, with Emerging Market (EM) issuers, including Poland and Chile, just beginning to get in the game.

Global Green Bond Issuance Over Time ($Billions)

Chart courtesy of Brandywine Global. Sources: Verisk Maplecroft, Climate Bond initiative, as of 1/22/2020. 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.


Brandywine Global’s analysis concludes that investors appear to favor countries with higher degrees of environmental commitment. The higher the environmental score, the lower the value of credit default swaps (CDS), suggesting that higher environmental scores are recognized by the marketplace as a real factor reducing a country’s credit risk.

As the trend toward green bonds continues, it may be only a matter of time before the other two components of ESG (sustainability and governance) join environmental issues in the valuation framework of the world’s fixed income market.

On the rise: U.S. cash on hand

Like other buyers of products and services, the U.S. needs to have cash at the ready to meet payroll, pay creditors, and make sure its checks don’t bounce. The Treasury Department’s cash on hand account is where that money is kept.

In the wake of recent increases in federal spending – financed in large part by issuing Treasuries – the average and peak cash-on-hand balances have skyrocketed. From a post-2008 financial crisis average of about $100 billion between 2011 and 2015, cash on hand reached as high as $450.5 billion at the end of January 2020 and looks to be averaging about $200-$300 billion since the 2016 election.

The 2015 policy of keeping $150 billion on hand, or at least five days’ worth of cash, appears to no longer meet the needs of the current system. By comparison, the Treasury’s pre-2015 policy was to make do with as little as a two-day reserve.

As cash comes in from tax payments and goes out when Treasury pays the government’s bills, reserves in the banking system move in the opposite direction. To some degree, then, bank reserve levels are at the mercy of Treasury operations.

That affects the Fed’s ability to manage its monetary policy and has in the past left the overall financial system short of ready cash – driving overnight rates from the Fed’s current target of 1.75% up to as high as 10%. The Fed has filled the gaps so far in the overnight rate with emergency repos, and now finds itself in the business of adding to emergency repo actions by buying $60 billion a month in Treasuries to add cash to the system.

On the slide: Japan’s GDP

The -6.3% fall in Japan’s annualized Q4 GDP from the previous quarter was a shock, even to a country inured to disappointing economic news. The figure was the worst since mid-2014.  The drop preceded any direct impact from the current coronavirus epidemic, although regional trade played a role nonetheless, in the form of the months-long slump in China’s demand for Japan’s exports.

Tourism from China is Japan’s biggest source of visitors by far, since an epidemic-led falloff in tourism from China seems all but certain. The Japan Association of Travel Agents expects at least 400,000 travelers from China to cancel trips through March. A $96 million package of emergency aid targeted toward businesses affected by the outbreak, along with a $120 billion stimulus package passed in late 2019, may help. However, a 2 percentage-point hike in the national sales tax, combined with the aftereffects of damage from a major typhoon in October 2019, make any economic damage from the viral outbreak all the more difficult to overcome.


Note: The year for all dates is 2020 unless otherwise indicated

1 Source: Verisk Maplecroft, Climate Bond Initiative, January 2020



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

The 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.

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

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.

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.

Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

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.



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: (98) Jin Guan Tou Gu Xin Zi Di 001; 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.

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

Derivatives, such as options and futures, can be illiquid, may disproportionately increase losses and have a potentially large impact on Fund performance.