Green bonds have performed rather poorly in recent months. Why are they still a good investment for institutional investors?

Green bonds are just like other bonds "at the mercy" of the capital market environment. Leaving the low interest rate environment has left its mark on bond prices accordingly. But that is looking in the rear-view mirror. Looking forward, the investment environment has greatly improved due to generally higher yields and more attractive risk premiums in the corporate bond segment. For example, the current yield on an index covering the green bond market has risen from around 0.5% a year ago to just over 3% currently (August 2022). And of course, the "green" argument of the fundamentally positive contribution to climate protection or the contribution to avoiding the emission of greenhouse gases is as valid as ever.

What are the prospects for investors of a green premium, i.e., a "greenium"?

The greenium results from the excess demand for green bonds, mainly for regulatory reasons due to still too little supply, even though this has improved significantly in recent years. The issue yield of green bonds is already usually lower than that of non-green securities of the same issuer, and this difference then very often widens. The less an issuer issues green bonds relative to its bond portfolio, the greater this effect seems to be. For the time being, this situation is unlikely to change. Demand will continue to outstrip supply, and both will continue to increase. On the supply side, the government bond sector still has a lot of potential. And in principle, "non-green" investors also buy green bonds.

The Raiffeisen-GreenBonds fund has outperformed its peer group over the past twelve months - and over three years. What is the reason for this?

The Raiffeisen-GreenBonds represents a balanced portfolio that takes advantage of opportunities on the interest rate and currency side and in the area of corporate bonds. As a result, the interest rate risk was recently reduced compared to the peer group, while the credit risk was increased and only part of the currency risk was hedged. This enabled the fund to profit from the appreciation of the dollar currencies, for example. Nevertheless, I must point out that past performance does not allow any conclusions to be drawn about future developments.

What distinguishes the fund, what are its strengths?

The strength of the Raiffeisen-GreenBonds fund is its balance between interest rate sensitivity, spread sensitivity of corporate bonds and the possibility of taking calculated chances on the foreign exchange market, i.e., not always hedging foreign currency bonds 100% on the currency side.  In addition, the fund invests exclusively in "green" bonds, and these must without exception have a positive external assessment by an agency of compliance with the "Green Bond Principles" prior to issue, the so-called "second party opinion". This also includes corresponding "impact reports" from the issuers on the positive effects of the underlying projects that are/were financed. This minimises the risk of greenwashing.