Don’t get me wrong, passive investing has a clear role for investors looking for a cost-efficient exposure to financial markets. In the realm of green bonds, it does raise serious questions though.

Taking your typical green bond index, this is a “free-for-all” of corporates having issued green bonds meeting certain standards of “quality” (typically meeting ICMA green bond standards). Investing in a fund tracking the index implies being comfortable buying green bonds from every single issuer. As the index does not screen for the issuers’ ESG credentials, this will include ESG laggards. Even more worrying is financing issuers that issue green bonds purely tactically – because they can. I doubt that there is a single issuer in the EUR IG market that would not be able to find half a billion green assets on its balance sheet and be able to issue a green bond. By indiscriminately financing every single green bond issuer, this is in a way of encouraging those without a genuine sustainability purpose to enter the market. They get a “greenium” benefit of coming in green format, and don’t even have to change their business – hooray. By genuine purpose I do mean where green bonds are a tool to support a clear environmental/climate strategy. For sustainablility-focused investors, common sense would dictate steering clear of issuers that have not made commitments to shift their business. It’s too easy to be satisfied when financing a few green assets regardless of the rest of the balance sheet – not worrying about what is under water when looking at an iceberg.

All investors have different sustainability objectives and convictions, hence a view of ESG leaders and laggards that justifiably differs. Nevertheless, not having a view is alike either encouraging the entrance of “weak” issuers in the green bond market or buying green bonds for marketing purposes, in both cases it smells like greenwashing.

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