Daily Brief: Investors Prove They’re Willing To Pay A Premium For Green Bonds

Daily Brief: Investors Prove They’re Willing To Pay A Premium For Green Bonds

almost 3 years ago3 mins

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Italy added green bonds to its menu earlier this week, and returns-hungry investors put in a record number of orders for them.

What does this mean?

Sustainable investing is still very much on the up, and European countries are cashing in on the boom to bankroll their eco-friendly post-pandemic recoveries. Italy’s a case in point: it just sold bonds earmarked for environmental projects for the first time ever. The country sold $10 billion worth to investors, but it received ten times that amount in orders. That’s not just twice the demand Germany saw in its own sale last year: it’s the most demand there’s ever been for a government’s green bonds, period.

Green Debt Surge

Why should I care?

For markets: No one knows for sure if sustainability pays.

The huge demand even meant Italy could get away with paying less income on the bonds, which just goes to show that investors are willing to pay a premium – or “greenium” – for that sustainability label. And as more and more evidence shows sustainable funds generate better returns than their less socially responsible peers, skeptics might argue that this situation is a perfect example why: funds’ investments aren’t necessarily providing better returns because they’re green, but because they’re branded green.

2020 Median Total Returns
Source: Morgan Stanley

The bigger picture: It’s all part of a “needs must” bond strategy.

Of course, a sustainable bond’s still a bond, and bonds have had their worst start to a year since 2013. Warren Buffett even warned his shareholders to steer clear of them in his annual letter. But some investors – think pension funds and insurance companies – have no choice but to dedicate a certain portion of their portfolio to bonds so as to guarantee their customers regular payouts. And since Italy’s are some of the highest-yielding in Europe (albeit some of the riskiest), they might be the best of a bad bunch.

Keep reading for our next story...

US To Pause Some UK Tariffs

Tariffs image

The US announced on Thursday that it’ll pause some tariffs on UK products, including Scotch whisky, clotted cream, and “biscuits” – whatever they are.

What does this mean?

Europe and the US have been arguing for the best part of 17 years over the billions in illegal subsidies they each give to their own plane makers, Boeing and Airbus respectively. And since boys will be boys, they’ve been slapping tariffs on each other's products for the last couple of years to make their point.

Fast forward to January, and the UK lifted some of those tariffs indefinitely in hopes that this post-Brexit flirting might lead to better trade relations. And it seems to be paying off: the US has said it’ll temporarily lift some of its own tariffs, meaning your dad’s favorite whisky can now be imported from the UK without an additional 25% duty.

Why should I care?

For markets: The UK’s biggest companies are set to benefit.

A trade bump should boost the bottom lines of those British companies that are particularly reliant on exports. So it’ll come as good news for the members of the FTSE 100, which – as part of an index of the country’s most valuable public companies – make on average three-quarters of their sales outside the UK.

FTSE 100 revenue
Data as of October 9th, 2019

The bigger picture: Even the smaller companies can’t keep a stiff upper lip.

While the members of the FTSE 100 stand to benefit from an uptick in global trade, those in the FTSE 250 – an index tracking the next 250 biggest companies – are more interested in Britain’s own economy. And with the UK ahead of the curve in the vaccine rollout, a robust recovery is looking more and more likely – leaving the Brits feeling uncharacteristically optimistic about the future.

Covid vaccination


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