Looking to Address Climate Change With Your Investments? Try Green Bonds

Can you address climate change with your investments? One way to do it is with green bonds, which can have a greater impact than investing in equities.

Green bonds raise money specifically for initiatives with positive climate or environmental impacts. Over the life of a green bond, issuers must report on the progress on the project the bond is funding. As such, they fit a growing demand for investors who want to track the broader effects of their capital on the planet. For fixed-income investors, this often means considering a bond’s use of proceeds, focusing on bonds that finance projects to benefit communities and the environment. For example, in February 2020, Goldman Sachs issued a $500 million green bond to solar energy projects and related infrastructure.

Green bonds are “one of the best ways to quantify the impact that investors can have because it’s directly financing projects that can be monitored over time and of which the impact can be calculated,” says Hortense Bioy, director of sustainable-investing research at Morningstar Sustainalytics.

Green bonds are just part of the spectrum of climate-related bonds, which include sustainability bonds and sustainability-linked bonds. Of the group, they are the largest and oldest investment vehicle. Green bonds remain a young investment category, though, so not all reporting metrics are standardized. “This is an immature space,” says Bioy. For example, not all green bond issuers report the impact of their projects, and often their disclosures vary widely for metrics such as carbon emissions or water use. “There are standards out there, but they’re not necessarily followed,” Bioy adds.

One silver lining for investors is that impact bond funds are cheaper than their traditional counterparts. Some 70% of the total green bond assets under management are held in share classes ranked in the cheapest or second-cheapest quintiles of their respective Morningstar peer groups. Particularly in Europe, well-constructed passive green bond exchange-traded funds are available, enabling investors who wish to access the asset class to do so at very reasonable costs.

There isn’t a green bond category in Morningstar Direct, so I had to do a little digging for this article. I used several search terms to scan the Morningstar fixed-income fund universe, including “green bond,” “green,” “sustainable,” “responsible,” and other related terms.

From this group, I looked for funds with more than $1 billion in assets. Then I ranked them by size, with the largest at the top. The largest is Amundi Euro Government Titled Green Bond UCITS ETF, a passively managed fund that tracks the Bloomberg Euro Treasury Green Tilted Index. Its largest holding is a 1.75% French Treasury Bond.

Here is a list of the 10 largest open-end and exchange-traded global green bond funds available to investors. Of these, five have beaten the Bloomberg MSCI Global Green Bond TR Hedged EUR over one year, and five are outperforming so far this year. (I opted to use this benchmark as my tool of comparison, as it is the primary prospectus benchmark for five of the 10 funds in this list.)

Largest Funds in the Green Bond Fund Universe

Amundi Euro Government Tilted Green Bond UCITS ETF Acc CB3

• Morningstar Rating: 3 stars
• Morningstar Medalist Rating: Silver
• Morningstar Sustainability Rating: Average

The $3.1 billion Amundi Euro Government Tilted Green Bond UCITS ETF Acc falls into the EUR government-bond category. The passively managed fund tracks the Bloomberg Euro Treasury Green Tilted Index. The fund rose 5.77% over the past year and is up 0.66% for the year to date, underperforming the benchmark in both metrics. The fund is one of two funds on our list to receive a Morningstar Medalist Rating. Morningstar has quantitatively assigned the fund this rating for having Above Average People and Process Pillars.

Goldman Sachs Green Bond

• Morningstar Rating: 1 star
• Morningstar Medalist Rating: Neutral
• Morningstar Sustainability Rating: Above Average

The $2.6 billion Goldman Sachs Green Bond fund, which falls into the EUR diversified bond category, rose 6.99% over the past year. For the year to date, the Goldman Sachs fund is up 1.50%. This fund has slightly overperformed the benchmark. The largest holding of this actively managed fund is a zero-coupon green bond issued by KfW Bankengruppe.

Multi Manager Access - Green, Social and Sustainable Bonds

• Morningstar Rating: None
• Morningstar Medalist Rating: Neutral
• Morningstar Sustainability Rating: Above Average

Over the past year, the actively managed Multi Manager Access - Green, Social and Sustainable Bonds fund rose 8.47%. The $2.3 billion fund has climbed 3.28% for the year to date. This fund is the top performer on our list over the past year and for the year to date, and it is the newest, with an inception date of March 2022. The largest bond holding is a supranational 0.625% green bond issued by the International Bank for Reconstruction & Development, maturing in 2025.

AXA World Funds - ACT Green Bonds

• Morningstar Rating: 2 stars
• Morningstar Medalist Rating: Neutral
• Morningstar Sustainability Rating: High

The $2 billion AXA World Funds - ACT Green Bonds rose 1.92% on the year to date thus far. Over the 12-month period, the AXA IM fund rose by 7.03%. This fund is the oldest on our list, with an inception date of November 2015. The actively managed fund’s largest holding is an Austrian Treasury bond. The fund is one of two funds on our list to receive the highest Morningstar Sustainability Rating.

Goldman Sachs Corporate Green Bond

• Morningstar Rating: 3 stars
• Morningstar Medalist Rating: Neutral
• Morningstar Sustainability Rating: Above Average

The $1.5 billion Goldman Sachs Corporate Green Bond, which falls into the EUR corporate bond category, rose 7.03% over the past year. For the year to date, the Goldman Sachs fund is up 1.92%. The largest holding is a BNP Paribas SA 0.5% bond, maturing in 2028.

BNP Paribas Funds Green Bond

• Morningstar Rating: 2 stars
• Morningstar Medalist Rating: Negative
• Morningstar Sustainability Rating: Above Average

The $1.5 billion BNP Paribas Funds Green Bond, which falls into the global bond - EUR hedged category, rose 6.49% over the past year. For the year to date, the BNP Paribas fund is up 1.36%. The actively managed fund is the only fund on our list to receive a Negative rating. This is attributed to the parent firm’s five-year risk-adjusted success ratio of 35%, which measures the percentage of a firm’s funds that survived and beat their respective category’s median Morningstar Risk-Adjusted Return for the period.

Eurizon Fund - Absolute Green Bonds

• Morningstar Rating: 2 stars
• Morningstar Medalist Rating: Neutral
• Morningstar Sustainability Rating: Above Average

The $1.4 billion Eurizon Fund - Absolute Green Bonds, which falls into the global bond category, rose 7.86% over the past year. For the year to date, the Eurizon fund is up 1.90%. The fund is actively managed, and its largest bond holding is a long-term Italian Treasury bond maturing in 2045.

Mirova Global Green Bond Fund

• Morningstar Rating: 2 stars
• Morningstar Medalist Rating: Neutral
• Morningstar Sustainability Rating: Above Average

The $1.4 billion Mirova Global Green Bond Fund, which falls into the global bond - EUR hedged category, rose 7.86% over the past year. For the year to date, the Natixis fund is up 0.93%. The fund is actively managed, with the top three holdings all being zero-coupon Treasury bills issued by Germany.

iShares Green Bond Index Fund (IE)

• Morningstar Rating: 2 stars
• Morningstar Medalist Rating: Bronze
• Morningstar Sustainability Rating: Above Average

The $1.3 billion iShares Green Bond Index Fund (IE) rose 6.63% over the past year. For the year to date, the BlackRock fund rose 1.04%. The passively managed fund tracks the Bloomberg MSCI Global Green Bond TR USD, meaning that the 0.13% return difference between the benchmark and the index can be attributed to tracking error. This fund is the second Medalist on our list, receiving a Bronze from our quantitative engine.

Amundi Responsible Investing - Impact Green Bonds

• Morningstar Rating: 2 stars
• Morningstar Medalist Rating: Neutral
• Morningstar Sustainability Rating: High

Over the past year, the actively managed Amundi Responsible Investing - Impact Green Bonds rose 7.07%. The fund beat its benchmark, the Bloomberg Global Green Bond Index, by 0.29 percentage points over the last year. The $1.2 billion fund has risen 1.88% for the year to date. The fund is the second fund on our list to receive a High Morningstar Sustainability Rating.