Green Bonds Were a Better Safe Haven Than Gold During the Pandemic

Climate-friendly debt offered better protection against stock market volatility, according to academic research.

Qilai Shen/Bloomberg

Qilai Shen/Bloomberg

During the height of the Covid-19 pandemic, one asset proved to be a better safe haven than gold: green bonds.

Climate-friendly debt served as a better protection against large market fluctuations than gold, as well as performing better than other environmental, social, and governance investments, according to new research from Imran Yousaf of Pakistan’s Air University, Muhammed Tahir Suleman of the University of Otago in New Zealand, and Riza Demirer of Southern Illinois University Edwardsville.

In the paper, the trio argued that green bonds were the “preferable safe haven” investment for passive investors hoping to defend their portfolios against the “uncertainty” of the pandemic. Conventional stock portfolios that included green bonds saw the highest risk-adjusted returns during the pandemic when compared against equity portfolios supplemented by gold and other ESG assets, the researchers found.

In a market downturn like the one seen at the onset of the pandemic, non-risky assets are few and far between. Investors often turn to gold as a familiar, if weak, safe haven asset — but green investments may be able to fill that role, according to the study.

A ‘Superior Safe Haven’

When compared to other environmental-, social-, and faith-based investments — including clean energy stocks and Islamic bonds — green investments, particularly green bonds, performed most akin to gold during economic downturns in the S&P 500 index. However, green bonds were the only asset on the researchers’ list that worked as a strong safe haven during the pandemic, a period of “heightened uncertainty,” the paper said. The list included gold, the S&P 500, clean energy stocks, Islamic bonds and stocks, and sustainability indices for global, North American, Eurozone, and emerging markets.

“Green bonds are the only asset in our list that serve as a safe haven against large market fluctuations during the Covid period — not even gold,” Demirer told Institutional Investor.

For their study, Demirer and his co-authors examined the hedge, diversification, and safe haven features of each asset type for passive investors during extreme fluctuations of the S&P 500 index. They used an equation to calculate the safe haven property of a given asset against the S&P 500’s volatility. If the asset’s estimate was positive, the researchers concluded it could not play the role of a strong safe haven. Inversely, if the asset’s estimate was negative, it was a strong safe haven.

In their calculations, the researchers found that green bonds were the only asset in their list with a negative estimate, concluding that green bonds are “a superior safe haven compared to all other assets (including gold).”

How Green Bonds Stabilized Portfolios

The researchers then created hypothetical passive portfolios supplemented by the different assets included in the study to determine the optimal allocation during the pandemic and over the full sample period of August 31, 2012 through November 20, 2020. Over the full sample, they found that adding green bonds to a hypothetical passive portfolio reduced portfolio risk to 0.291 percent and decreased volatility by 72.5 percent, making a “particularly striking” case for green bonds, the report said.

“These green investments, especially investing in green bonds, are not luxury investments where only loyal, dedicated investors put their money regardless of their investment benefits, because they believe in those investments. It’s not like that,” Demirer said. “There’s also financial benefits to socially and environmentally responsible investments.”

During the pandemic period, the researchers saw similar risk reduction trends for passive portfolios supplemented with green bonds: Green bonds helped reduce volatility in a portfolio by 80.7 percent, according to the paper. Islamic stocks and gold also yielded good results, reducing return volatility by 83.4 percent and 45.8 percent, respectively. But, for the authors, green bonds “stand out” because of their large risk reduction capabilities and “significant improvement in risk-adjusted returns,” according to the paper.

“It’s really good news for not only investors who believe in these principles, but also for corporations and governments — any issuer — who want to issue securities that are geared toward environmentally and socially responsible investments,” Demirer said.

According to Demirer, investors who were able to use green bonds as safe havens during the pandemic benefitted from “loyalty” to sustainability during the a period of heightened uncertainty: “Investors kept their money in those investments, and even invested more money, even during the pandemic period when all investors were scared to keep money in equities,” he said. “But it looks like those investors who believed in those social and environmental investment principles will be rewarded.”