As explained in one of previous articles; ‘How do our Social-Fintech members raise capital?’ socially responsible investing (SRI) is on the rise. During this article we will touch on the burgeoning green bond market; its history, development and social benefits.
The green bond market kicked off in 2007 with the AAA-rated issuance from multilateral institutions European Investment Bank (EIB) and World Bank. From then the pick up was reasonably slow, (as seen below), until march 2013 where the USD1bn green bond, issued by the International Finance Committee (IFC) sold out within an hour, elevating green bonds into the mainstream markets. From there on the market has experienced strong levels of growth (over the course of just one year—2017—new green-bond issuance grew by 78 percent, to more than $155 billion worldwide).
March 2014 saw the issuance of the first corporate bond by Vasakronan, a Swedish property company, who has since then issued green bonds totalling SEK 18.5 billion, making it the Nordic region’s largest issuer of green corporate bonds. Other large corporates including SNCF, Berlin Hyp, Apple, Engie, ICBC, and Credit Agricole are also issuers of bonds.
**As of July 2018**
Below we have some IFC Green Bond Data.
How does a green bond work?
Green bonds were created to fund projects that have positive environmental and/or climate benefits. The majority of the green bonds issued are green “use of proceeds” or asset-linked bonds. Proceeds from these bonds are earmarked for green projects but are backed by the issuer’s entire balance sheet. There have also been green “use of proceeds” revenue bonds, green project bonds and green securitised bonds.
Green Bonds also come with tax incentives such as exemption and credits, providing monetary incentives to tackle issues such as climate change. To qualify for green bond status, they are often verified by a third party such as the Climate Bond Standard Board, which certifies that the bond will fund projects that include benefits to the environment.
Below are the different types of green bonds on the market
|Type||Proceeds raised by bond sale are||Debt recourse||Example|
|“Use of Proceeds” Bond||Earmarked for green projects||Recourse to the issuer: same credit rating applies as issuer’s other bonds||EIB “Climate Awareness Bond” (backed by EIB); Barclays Green Bond|
|“Use of Proceeds” Revenue Bond or ABS||Earmarked for or refinances green projects||Revenue streams from the issuers though fees, taxes etc are collateral for the debt||Hawaii State (backed by fee on electricity bills of the state utilities)|
|Project Bond||Ring-fenced for the specific underlying green project(s)||Recourse is only to the project’s assets and balance sheet||Invenergy Wind Farm (backed by Invenergy Campo Palomas wind farm)|
|Securitisation (ABS) Bond||Refinance portfolios of green projects or proceeds are earmarked for green projects||Recourse is to a group of projects that have been grouped together (e.g. solar leases or green mortgages)||Tesla Energy (backed by residential solar leases); Obvion (backed by green mortgages)|
|Covered Bond||Earmarked for eligible projects included in the covered pool||Recourse to the issuer and, if the issuer is unable to repay the bond, to the covered pool||Berlin Hyp green Pfandbrief; Sparebank 1 Bolligkredit green covered bond|
|Loan||Earmarked for eligible projects or secured on eligible assets||Full recourse to the borrower(s) in the case of unsecured loans. Recourse to the collateral in the case of secured loans, but may also feature limited recourse to the borrower(s).||MEP Werke, Ivanhoe Cambridge and Natixis Assurances (DUO), OVG|
|Other debt instruments||Earmarked for eligible projects||Convertible Bonds or Notes, Schuldschein, Commercial Paper, Sukuk, Debentures|
Source: Climate Bonds Initiative
Key Figures from Q3 2018
Green bonds in Q3 2018 totalled USD29.7bn, a 23% drop compared to Q3 2017. Looking at issuance for the three quarters of 2018 reveals a more reassuring trend, with USD108.3bn falling short of 2017 figures for the same period by less than 1%.
Q3 volumes were driven by both financial and non-financial corporates, which accounted for 18% each. Government-backed entities were also active in the market representing 16% of the total, with issuance equally split between developed and emerging markets.
By the end of Q3 2018, USD66bn worth of green ABS have been recorded in the CBI Green Bond Database, USD7bn of covered bonds and USD3.8bn other secured bonds, including debentures. All-in-all secured green bonds account for about 17% of cumulative green bond issuance.
Source: Climate Bonds Initiative
Case Study: Amundi Planet Emerging Green One (EGO) fund.
On Friday the 16th of March 2018 IFC and Amundi, Europe’s largest asset manager, announced the successful launch of the world’s largest targeted green bond fund focused on emerging markets, the Amundi Planet Emerging Green One (EGO). The fund, which closed at $1.42 billion, is expected to deploy $2 billion into emerging markets green bonds over its lifetime, as proceeds are reinvested during 7 years. With a $256 million cornerstone commitment from IFC, the fund aims to increase the capacity of emerging market banks to fund climate-smart investments.
Room for improvement
Although the market is undoubtedly showing signs of growth, and having a positive effect on climate change and other pressing global problems, there is still a lot of room for improvement. In order to continue to grow the market must address a few key issues. As it stands there is still no obvious pricing advantage for green bond apart from tax benefits as the additional reporting requirements necessary for issuing a green bond make it an arduous and expensive process. It also requires vast analysis and expertise to select projects and measure their impact on the environment (invoicing of external experts upstream and throughout the life of the bond to establish a reporting system)
Although the prementioned issues in the market threaten growth, the lack of supply coupled with an increased demand may encourage a greater range of issuers to enter the market, which could in turn persuade more asset managers to dedicate more capital to the space. That sort of virtuous circle could ultimately be a powerful catalyst for continued growth.
Green bonds represent an exciting possibility for both social and financial profit, and with the right governance and macro-economic conditions, can make a real difference by tackling some of the world’s most pressing issues.