Pension funds invest more in green bonds than other investors

Funds unperturbed by prices of going green

Pension funds invest more in green bonds than other investors

Pension funds invest more in green bonds in comparison to investors such as banks and insurers, a study conducted by Martin Boermans, an economist from the De Nederlandsche Bank (DNB) said, as reported in an article by IPE.

The central bank’s data showed that Dutch pension funds invested around 47 billion euros in green bonds at the end of Q1 this year. On average, that accounted for 7.4% of their bond portfolios. Meanwhile, the corresponding figure for investors in Europe only amounted to 3.5% as only 1.5% of fixed income investments made by investors in other countries were directed towards green bonds.

With European pension funds allocating 6.9% to green bonds on average, Boermans noticed a trend wherein pension funds were more than likely to invest in green bonds if there is a big domestic supply. If issued domestically, these funds would hold between 20% to 57% more green bonds.

Apart from this, pension funds also seemed to not care about the prices of green bonds when investing.

“You see that other institutional investors such as insurers and banks are buying fewer green bonds as the greenium [the premium investors are willing to pay for green bonds, red.] rises. But pension funds continue to buy extra when that happens. They display lower price elasticity than other investors.” said Boermans.

With Dutch pension funds buying green bonds, the percentage of green debt securities in the total bond portfolio had increased to 7.4% since 2020.

Boermans said that there were two possible explanations behind this preference for green bonds. The first is pressure from fellow members of the pension fund as well as society. The second is that pension funds expect that green bonds demand would increase more in the future and because of it, they were willing to pay a premium.

While there is this preference for green bonds, investors still distinguished how much green bonds actually contribute to the welfare of the environment.

“Investors consider some green bonds a form of greenwashing. After all, they often involve spending that companies or governments would have done anyway, and it is not clear how those specific bonds are now contributing to the energy transition. In those cases, the incentive to pay extra for such a bond also disappears.” said Boermans.

However, greenium has been declining recently with it having barely five basis points for most maturities because the supply of green bonds has significantly grown in recent years.

“The group of investors willing to pay a greenium appears to be relatively small. Whereas in a smaller market this group could drive up prices, this effect is now gone.” explained Boermans.

He further said that greenium may eventually increase prices again if the number of investors who prefer green investments would be much more than the supply of green bonds.