Green bonds are here to stay after German government’s entry into the market, says Colin Finlayson

The German government’s entry into the green bond market could spark a flurry of similar issuance from other European countries, says Colin Finlayson, co-manager of the Aegon Strategic Bond Fund.

Earlier this month, the German government raised €6.5 billion from its first-ever green bond, which was hailed as a landmark moment for this niche but growing part of the fixed-income sector.

Green bonds are used by governments to fund climate-related or environmental projects in order to make their economies greener.

Finlayson believes Germany’s first green bond issue could set the benchmark for other European nations to follow suit, opening up new opportunities for investors.

He said: “With Germany leading the way, this will make it easier for other European countries, in particular, to issue their own green bonds as they now have a benchmark bond to price themselves relative to.

“Green bonds will become an increasing part of the bond market and with that will come potential opportunities for investors.”

However, while Finlayson expects green bonds to become a growing part of the market, he believes it may take time for them to be seen as a viable alternative for traditional investors.

He added: “As an investment alternative to conventional or traditional bonds, it is not yet clear whether green bonds will offer a superior return.

“For example, the German bond was issued at an almost identical yield to its conventional cousin and investors will also face a lower level of liquidity.

“Instead, the interest and demand will come from those who are making a conscious decision to support a government’s efforts to invest in more climate friendly or sustainable projects.”