Green bonds pursue their global reach

Asia and Europe are leading the way as green bonds develop fast.

In April, the IBRD (World Bank Group) issued its first green bond denominated in Hong Kong dollars, in a deal that marked the 19th currency in which the supranational borrower has sold debt designed to tackle climate change by financing environmentally sound projects. This highlights the remarkable diversity of currencies now used for green bond issuance, even if the Euro remains the first currency of issuance, and the extent to which Asia and Europe are leading the global growth in sustainable debt financing.

“Top quality borrowers like the World Bank Group and the wide range of currencies and structures now available are helping to attract new investors to the green bond markets,” said Stephane Marciel, head of sustainable bonds, debt capital markets, at Societe Generale CIB, which was joint lead manager of IBRD’s debut green Hong Kong dollar bond issue.

“This is also a sector that is seeing growing diversity in its issuer base, meaning that more borrowers than ever are implementing sustainable bond programmes, and investors can choose between different return and risk profiles.”

- Stephane Marciel
Head of Sustainable Bonds, Debt Capital Markets, at Societe Generale CIB

As an illustration, in the public sector, where green issuance was long dominated by development banks and supranationals, sovereigns have become sizable issuers. Societe Generale CIB was also a lead on the €7bn bond last year from France that was the first euro-zone government green benchmark issue, and the biggest green bond to date, with a total amount outstanding including taps of €10.8bn. Moreover, Poland priced its second green bond in January 2018 for an amount of €1bn and a tenor of 8.5 years, financing renewable energy, clean transportation, and sustainable agriculture operations among others, with proceeds kept in a dedicated “green cash account” to fund eligible projects only. Indonesia ($1.25bn 10-year green Sukuk) and Belgium (€4.5bn with a 15-year tenor) also joined the ranks of sovereign green bond issuers earlier this year.

Within a green bond framework, a bond’s economic and regulatory characteristics can differ. Supranationals continue to vary issuance currencies to respond to specific investor interests, while banks and corporate issuers have raised green debt in subordinated format. Secured products also lend themselves to green issuance: in June 2016 Dutch Obvion issued the first green RMBS, which was rewarded at Climate Bonds’ Green Bond Awards 2017.

While green issuance is becoming more common across product classes, the identification of eligible assets and the development of reporting frameworks remain key prerequisites. German bank LBBW overcame this challenge by developing an innovative methodology for identifying energy-efficient buildings, issuing its first green bond last autumn to finance green commercial buildings and renewable energy. LBBW’s green bond was certified by the Climate Bond Initiative (CBI) and covered by a second party opinion from Oekom.

Meanwhile, institutional investors are multiplying commitments and creating new funds to invest in green, social and sustainability bonds. In mid-March, IFC and Amundi closed the world’s largest green bond fund with $1.42bn dedicated to emerging market banks, and around the world investors have launched various initiatives for sustainability investments.

Public and private initiatives having laid the ground work for the green bond market, regulation can now boost its further development. In Europe, public authorities continue to press the sustainable finance agenda ahead. Most importantly, the European Commission, in its Action Plan on financing sustainable growth of last March, committed to producing a taxonomy of green activities and a set of EU green bond standards in Q1 and Q2 2019. The EU Commission is also looking to increase the flow of capital to sustainable investments, envisioning for instance the potential inclusion of a “green supporting factor” in regulatory requirements and the integration of sustainability preferences in financial advice through MIFID II.

Asian regulators have also acted quickly to support the development of a sustainable finance market, including the endorsement of ASEAN green bond principles, which were launched in November 2017 and go beyond the ICMA’s GBP in terms of access to information, frequency of reporting and external review. As sustainable financing is gaining importance in the region, with the World Bank putting potential demand for green investment in the region until year 2030 at approximately $3trn, the standards should provide guidance to issuers and a credible reference point to investors.

In a report issued at the end of January, Moody’s noted that the lack of universally agreed green bond standards or a global taxonomy is not holding back growth in the sector. While growth is slowing down as the market is becoming more mature, green bond issuance volumes continue to increase. The pipeline remains strong and SG CIB maintains its estimate of €150-160bn green bond issuance for 2018, with Asia and Europe leading the way.

With all these shaping developments in the green bond market, the doors are opening wider for issuers contemplating green bond issuance.

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