Global growth is slowing. Last week the Federal Reserve cut its median growth forecast for this year to 2.1% from 2.5%. The European Central Bank (ECB) this month reduced its 2019 growth forecast to 1.1% from 1.7%. Speaking on 27 March, ECB President Mario Draghi said that the risks to the outlook remain tilted to the downside, although he added that a “soft patch” doesn’t necessarily foreshadow a serious slump.

We share Draghi’s sentiment that decelerating growth doesn’t mean a recession is imminent. But the cycle is in its latter stages and so considering assets with a more conservative sector and risk profile is appropriate. Green bonds fall into this category:

* Green bonds have a less cyclical profile. Utilities, banks and development agencies typically fund a number of projects that qualify as "green" under the Green Bond Principles. Many large cyclical sectors, including cyclical consumer (like autos), technology, media, basic materials and oil and gas, have so far been negligible issuers in the green bond market.

* Since 2015, it has been big enough to allow for meaningful relative comparisons. Despite its more conservative sector and credit risk profile, the green bond index has achieved an almost identical total return as the ICE global corporate credit index (almost 20% cumulatively).

* The relative performance of green bonds and IG bonds has diverged at different periods since 2015. Green bonds have outperformed during periods of widening risk premiums and underperformed when risk premiums in cyclical industries tightened a great deal.We believe that credit risk premiums are likely to rise gradually, given the well advanced business cycle and potential recession risks over the next two to three years. So we recommend partially replacing allocations to investment grade bonds with a diversified green bond portfolio to increase portfolio resilience to negative surprises, while achieving a similar performance in case risk premiums remain tight. The added sustainability value of this switch comes at no additional cost. Read more in our report, Green bonds: Sustainability meets late-cycle stability.