The quiet evolution of ‘green’ bonds in global portfolios

The ‘green bond’ market, once a niche segment, is now emerging as a core allocation within institutional fixed income portfolios. And as the sector develops, investors increasingly see the bonds as exactly that: just bonds, without the qualifier.

Speaking to an audience of Australian investors spanning institutions, family offices and private wealth firms, Johann Ple, Paris-based fixed income portfolio manager at AXA Investment Managers, painted a picture of a maturing market with growing global relevance. “Europe is still the engine,” he said. “We had €450 billion to €500 billion ($792 billion–$880 billion) in issuance last year, and we expect many of those bonds to roll-over. Once issuers enter the green bond market, they tend to come back.”

But it is not just Europe fuelling demand. “We’ve seen increasing engagement from clients in Asia and Australia. Regulation, transparency, and sustainability commitments are creating the same conditions for growth that we saw in Europe ten years ago,” Ple noted. “The Australian government’s green bond issuance is a good example. Sovereigns stepping into the market adds size and legitimacy.”

Ple is pragmatic about performance. Green bonds have performed well compared with traditional benchmarks in recent years, not due to magic, but because of structure. “The green bond universe has a higher allocation to credit — around 50 per cent. That’s a key driver of relative returns, especially in benign markets,” he explained. “Duration and ratings are roughly the same as aggregate indices, so the key differentiator is credit exposure.”

Still, investors must tread carefully. “There’s no universal definition of a green bond. Labels exist, but they are voluntary. You need to conduct your own due diligence,” he cautioned. “You must assess both the issuer — are they credible, committed to Net Zero — and the underlying projects. Are they truly aligned with climate goals?”

Ple sees green bonds as the most efficient instrument for aligning fixed income portfolios with sustainability objectives without compromising risk or return. “Whatever the size of the market, what matters is direction. If you want more alignment with Net Zero, you need to invest in climate-aligned issuers and projects. Green bonds let you do that, and they also offer a powerful channel for engagement.”

He also dispelled a common misconception — that green bonds are priced with a significant premium. “Three or four years ago, yes, green bonds were slightly more expensive. Now, the ‘greenium’ is about one basis point, on average — it’s negligible. Today, they’re priced like conventional bonds, on their own merits.”

That doesn’t mean there are no risks. “There’s a reputational risk if you don’t do the work. Some NGOs (non-governmental organisations) have flagged funds claiming to be green that hold questionable exposure. You also have portfolio construction risks — if your allocation is skewed toward euro credit, you’re taking a bet. But these are manageable,” he said.

As for the US, Ple was candid. “The Inflation Reduction Act should have been a catalyst, but it didn’t materialise. The US has never been a core contributor to the green bond market, so this is more a missed opportunity than a setback. But at some point, they’ll have to wake up. You can ignore a problem, but that doesn’t mean it isn’t there.”

Ple’s approach is flexible but disciplined. “We run a low-tracking-error strategy — plus or minus two years of duration — aiming for 75 to 100 basis points of annual outperformance. Right now, we’re close to benchmark duration, slightly biased toward euro rates. We see value in short-dated subordinated credit and avoid aggressive spread risk.”

He also emphasised that green bonds are not just for ESG-focused funds. “I manage both green and conventional strategies. Often, when I like a green bond, I’ll hold it in both. It’s not about buying to feel good — it’s about getting quality exposure, with additional transparency and impact. If you don’t care about tracking error, it’s a very efficient allocation.”

In closing, Ple offered a message that resonated across investor types: “Green bonds are not charity. They’re not priced for idealists. They’re simply bonds — credible, measurable, transparent. And increasingly, they’re just part of how fixed income portfolios are built.”