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Portfolio analysis

Green bonds: a portfolio perspective

Written by Jonas David & Josephine Richardson

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The green bond market has experienced meaningful growth in recent years, offering fixed income investors a valuable means to support the climate transition.

However, as the market represents a relatively small share of global investment-grade debt, it can be challenging for investors to allocate to this asset class at scale – and in a way that doesn’t veer from benchmark performance and risk.

In this note, we provide a detailed examination of the Bloomberg Global Aggregate Index and the related Green Bond Index. We explain how they differ in currency composition, duration, and sector weighting, and what this means for investors. This analysis reveals a “tracking error dilemma” for investors considering an allocation beyond the Global Aggregate’s current ~2.7% green bond weight.

We then outline several practical approaches for addressing this challenge. These include green tilting, core-satellite portfolios, and adjustments that rebalance government bond exposure. Each option offers investors a way to increase their green bond allocation according to their risk tolerance and portfolio objectives.

About the authors

Jonas David

Jonas David

Research Director

Based in London, Jonas researches the role of fixed income markets in the climate transition, focusing on key sectors, sovereigns and development finance. He previously worked in emerging markets fixed income at Morgan Stanley Investment Management and UBS.

Josephine Richardson

Josephine Richardson

Managing Director, Head of Research

Based in London, Jo leads AFII’s research and a global team supporting fixed income investors as they align their portfolios with climate and sustainability goals. She joined AFII after 18 years in fixed income markets at JPMorgan.

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