Green bonds have emerged as a promising financial instrument that fosters environmental sustainability while offering potential portfolio diversification benefits. The article "The Beneficial Role of Green Bonds as a New Strategic Asset Class: Dynamic dependencies, allocation and diversification before and during the pandemic era" analyzes green bond market dynamics, their co-movements with traditional financial assets, and their role in asset allocation strategies from January 2014 to June 2021.
The research highlights that green bonds provide risk diversification benefits, particularly during financial downturns, such as the COVID-19 pandemic. Despite their promising features, full integration into investment strategies remains a challenge, as the market would benefit from an increased development, in terms of size and transparency.
Key findings suggest that:
- Green bonds enhance portfolio diversification, particularly through the Solactive Green Bond Index, which exhibits lower correlation with traditional corporate bonds.
- During periods of market distress (e.g., COVID-19 pandemic), green bonds demonstrated safe-haven properties, reducing overall investment risk.
- Portfolios constructed with the inclusion of green bonds prove preferable in terms of risk, in all periods under strategy and for all asset allocation strategies, while the superiority of returns depends on the allocation strategy.
- Investors with high risk aversion benefit most from incorporating green bonds into their portfolios.
