The green bond myth: that they are a separate asset class
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Reflections following "Debating the myth of green bonds," BNP Paribas Asset Management's summer panel with Investors for Purpose:
Institutional investors have had roughly a decade to make up their minds about green bonds. They still haven't, and the timing of that indecision matters more than usual right now. In March, the government tried to settle a related argument - what counts as a "financially material consideration" under fiduciary duty, and how that sits against members' best interests - by adding a clarifying clause to the Pension Schemes Bill. The Lords promptly rejected the part that would have forced ministers to issue statutory guidance on it, worried it was "mandation by the backdoor." A separate Technical Working Group is now meant to produce something trustees can actually use. No output yet.
Into that vacuum walked 20 asset owners, managers and consultants at BNP Paribas Asset Management's offices, asked to debate whether green bonds are what they claim to be.
Into that vacuum walked 20 asset owners, managers and consultants at BNP Paribas Asset Management's offices, asked to debate whether green bonds are what they claim to be.
The panel's answer, more or less, was: wrong question. The real myth isn't that green bonds deliver - the data says investors already believe they do. The myth is that green bonds are a separate decision at all.
Enthusiasm without commitment
Three in four UK insurers and DC schemes call green and sustainability bonds relevant to their portfolios, according to mallowstreet's 2024 Sustainable Fixed Income research. That's a strikingly high number for an asset class that, in the same breath, almost none of them want as a dedicated allocation. Ask an investor whether green bonds matter and they say yes. Ask them to build a standalone green bond fund and the enthusiasm evaporates.
The explanation the panel kept circling back to is mundane rather than ideological: relative value. Investors assess fixed income against fixed income, full stop. Instructing a manager to hold only labelled bonds means giving up flexibility for no clear compensation, so the sustainability case has to be won inside the broader book, not carved out of it.
This is the "turn the telescope around" argument that came from the floor rather than the panel itself, and it's a fair challenge to managers still pitching green bonds as a bolt-on product: investors don't want a green bond fund. They want their existing fixed income exposure to do more, and they'll take green bonds as part of the answer if the numbers stack up.
The engagement case is stronger than the marketing
Here's where the panel's fixed income specialists pushed the conversation somewhere more interesting. Green bond issuers, on this account, decarbonise faster than the average, in part because managers holding those bonds are in genuinely active dialogue with them - and are willing to divest in an orderly way when improvement doesn't materialise. That's engagement in its purest form: not a voting right at an AGM, but a live, ongoing conversation backed by a credible exit.
The consequence is awkward for anyone trying to keep green bonds in their own box. If engagement of that quality is happening, green bonds start to look less like a distinct product and more like the sharp end of the entire investment-grade universe. There's reportedly a current peak in engagement requests directed at green bond issuers specifically - and green bond investors are better placed than most bondholders to push those requests harder, because they're holding a different relationship with them.
It also complicates the standard worry, voiced for years by UK schemes, that fixed income doesn't allow for engagement the way equities do. Our own 2021 research found over half of mid-sized schemes (£1bn–£5bn) and two in five smaller schemes held exactly that concern. If green bond investing really does function as engagement with teeth, that long-standing objection needs revisiting.
Additionality: the concept doing too much work
The panel spent real time on additionality - whether a bond's proceeds cause something to happen that wouldn't have happened anyway. Some issuers have simply stopped trying to prove it because they are admittedly behind on their targets - so they go pure-play instead. Others are sustainable enough across their whole balance sheet that additionality, as a bond-level concept, no longer applies to them.
That scepticism about formal proof shows up elsewhere too: external verification of green bond credentials was not in high demand among investors in 2024, and it isn't in natural capital markets either as of early 2026. Read together, this looks less like investors being careless about greenwashing and more like a quiet vote that heavyweight verification frameworks are not a credibility fix.
The UK is behind, and not because of appetite
One data point from Investors for Purpose's own research deserves more attention than it had: UK investors have target allocations to impact but actual investments trail the European average significantly. That gap doesn't look like a story about scepticism, since the interest numbers above suggest UK investors are just as convinced as anyone. It looks more like a story about implementation lagging conviction, which is a very different problem to solve than reengaging with green bonds as a concept.
Where this leaves managers
The clearest instruction to come out of the room was blunt: stop explaining why green bonds are good, and start explaining why they perform. After five to ten years of investor education campaigns, the audience's patience for being told green bonds do good has run out - what's missing is plain-English detail on returns, risk and process, not another reason to feel virtuous about the asset class.
For fixed income managers:
- Blend green and sustainability bonds into the core investment-grade allocation rather than pitching a standalone fund investors have no reason to ring-fence.
- Lead engagement conversations with green bond issuers explicitly and report the outcomes - this is your strongest evidence, and it's under-marketed relative to the labelling debate.
- Replace additionality frameworks with plainer, outcome-based reporting; don't force issuers that are already sustainable end-to-end through an exercise designed for laggards.
- Prioritise performance data and risk metrics over impact narrative in client communication - investors are asking for evidence, not encouragement.
For trustees and asset owners:
- Treat green bonds as a relative-value decision within fixed income, not a values-based carve-out requiring separate governance.
- Use fiduciary duty guidance developments (the Technical Working Group's output, when it lands) to clarify internal decision-making and take out legal advice, rather than waiting for legislative certainty that may not arrive.
- Revisit assumptions about fixed income and engagement - the evidence on green bond issuer dialogue suggests the asset class may already be doing more than commonly credited.
In the end, the myth debated at BNP Paribas Asset Management's event was not really about whether green bonds work. It was about whether the industry still needs to treat them as a separate question. Increasingly, the room seemed to think it doesn't.
