The corporate green bond market is forecast to reach $20bn this year, double the size of last year’s issuance, according to Standard & Poor’s.
The rating agency said this reflected how green bonds, earmarked for environmental purposes, were an important source of capital for companies and were also increasingly popular with investors.
This emerging area of corporate finance was highlighted last week when the largest ever green bond, worth $3.4bn, was issued by GDF Suez, the French power company. This almost doubled the previous record of $1.9bn set by another French power company, EDF.
Michael Wilkins, an analyst with S&P, said that crucially for investors, the credit risk of a corporate green bond remained on the issuer’s balance sheet.
“This means that, unlike with multilateral bank issuance, investors do not have to sacrifice yield to gain green exposure, nor significantly increase their risk profile in order to invest in assets that aid environmental efforts,” he said.
The Climate Bonds Initiative, a non-profit organisation that promotes investments to combat climate change, predicts total green bond issuance from all sectors will reach $40bn in 2014.
However, based on the amount of green bond issuance so far this year, S&P thinks that half this figure could easily be reached by corporate issuance alone.
“Entry into this expanding market is enabling corporates to tap an additional pool of investors who are committed to principles of socially responsible investing,” said Mr Wilkins.
The agency said corporate issuance was likely to accelerate not only because this helped diversification of investor pools, but because of investors’ growing intention to implement environmental, social, and governance targets initiated by the UN Principles for Responsible Investment.
As of last month, the 1,188 investors who had signed up for the principles represented about $34tn of assets under management – more than double the amount five years previously. In addition, the UN principles have encouraged 30 stock exchanges to enhance environmental, social and governance disclosures among their listed companies.
Unilever recently became the first fast-moving consumer goods company to issue a corporate green bond, worth £250m, the proceeds of which will be used for a wide variety of environmental projects globally, and are intended to aid diversification.
While the corporate green bonds issued so far have been from well-known and higher-rated names that are associated with environmental, social and governance principles in the market, S&P said they could pave the way for other corporate entities.
“The bonds have been issued in Europe, backed by a gradually improving economic outlook,” said Mr Wilkins. “This may change if green bonds attract US investors, who enjoy a larger source of liquidity in their domestic markets.”
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