Movements in the currency of denomination of some

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movements in the currency of denomination of some green bonds in the indices increase the measured return volatility. This points to the importance of the availability of currency hedges for investors in green bonds. 14 13 The universe of labelled green bonds from Bloomberg and CBI has an average rating of slightly below AA. The average maturity and duration of the global bond indices and the different green bond indices are quite similar, but sectoral and currency compositions differ. 14 Importantly, some researchers (eg Andersson et al (2016)) have shown that it is possible to construct a portfolio of green instruments that has an identical performance to that of a broader market index. This would provide a product for a wide range of green investor that yields a financial performance equal to that of a diversified market portfolio, but with environmental benefits. Green bond indices: return characteristics Annualised monthly total returns, July 2014–June 2017; in per cent Table 3 Hedged returns 1 Unhedged returns 2 Cumulative over 36 months Mean (1) Std dev (2) Sharpe ratio = (1)/(2) Cumulative over 36 months Mean (1) Std dev (2) Sharpe ratio = (1)/(2) Green bond indices Standard & Poor’s . . . . –4.18 –1.48 18.44 –0.08 BofA Merrill Lynch 9.17 3.06 8.64 0.35 –6.45 –2.15 18.92 –0.11 Solactive . . . . –4.52 –1.51 18.66 –0.08 Barclays MSCI 10.23 3.41 9.61 0.35 –3.43 –1.14 17.23 –0.07 Global bond indices Broad-based 11.26 3.75 11.64 0.32 3.46 1.15 14.97 0.08 AA average rating 10.29 3.43 10.21 0.34 0.97 0.32 14.16 0.02 A average rating 11.02 3.67 10.99 0.33 3.12 1.04 14.08 0.07 1 Total returns for indices hedged against currency risks, which are more comparable across indices that differ in their currency composition. They represent a close estimation of the return that can be achieved by hedging the currency exposures of the underlying index by selling foreign currency forwards at one-month forward rates. Hedged returns are not exact measures of the true returns, since they do not include transaction costs for hedging contracts. Those can be considered small, in particular, since euro exposures present the largest foreign currency component (see also Graph 1). Bid-ask spreads on EUR/USD forwards, which are an indicator of transaction costs, are usually between 1 and 1.5 bp. 2 Total returns from holding a simple position in the respective index. Green bond indices differ substantially in their currency composition from the global bond indices. Hence, currency movements will significantly affect return differentials between green bond and global bond indices. Sources: Bloomberg; Barclays; authors’ calculations.
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100 BIS Quarterly Review, September 2017 The green label and exposure to environmental risks Carney (2015) describes the potentially severe impact of climate change on the economy as a “tragedy of the horizon”: investors and other actors do not sufficiently take the risks into account as they materialise only over a long horizon. Indeed, a number of academic studies have documented a tendency for investors to inadequately price environmental risks (Hong et al (2016) and references therein).
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  • Fall '15
  • Wei WANG
  • Finance, BIS Quarterly Review, green bonds, green bond, Green Bond Principles

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