There have been just 11 deals totaling $6bn equivalent of sterling green bonds issued in total, of which $4.2bn came from seven trades from the European Investment Bank and KfW. Moody’s estimated that there will be $120bn equivalent of green bonds issued globally in 2017, following $93.4bn issued in 2016, according to the company.
The size of the green bonds that have priced in sterling, and the level of interest in them shows the demand is there. Over 50 investors met Anglian on the roadshow and the order book was over £750m. UK fund managers like green bonds and many now have separate green mandates and funds.
So why have only Transport for London, Lloyds Bank, Unilever and now Anglian Water supplied that demand?
On Tuesday, Fitch Ratings published a report saying “diversification is the main portfolio management challenge for green bond funds as issuer numbers are limited and concentrated in certain sectors.” Fitch estimates “there are around 100 issuers, compared with the 3,000 names in broader market indices… while AUM in green bond funds have grown more than 400% since the end of 2015.”
The underlying problem is not perhaps with sterling therefore, so much as UK-based issuers. It is not that UK issuers prefer to issue their green bonds in euros or dollars. Only two green bonds linked to UK companies have printed in euros and none at all in dollars.
HSBC used its French subsidiary to issue a €500m seven year green bond immediately before the Paris Climate Change Conference in 2015. Shanks is a UK waste management company, but has significant operations in Belgium and the Netherlands, and targeted retail investors in Belgium and Luxembourg with its €100m offering.
So, while many UK based investors do like to buy sterling bonds when they can, they are happy to buy in euros, and just as happy buying non-UK credits as UK based ones. This situation is not unusual to UK investors.
Until the sterling corporate market came to life, following the Bank of England’s corporate bond purchasing programme almost 12 months ago, UK investors had slim pickings from the sterling market. Issuance was limited to domestic issuers with an almost exclusive need for sterling. Only for such issuers did sterling offer any pricing advantage over euros, meaning sterling volumes were very low compared to the last year.
It is also fair to say that green issuance by corporates has been patchy in all currencies. SSAs have been the biggest users of the green bond market, and the UK lacks any domestic SSAs, other than, arguably, Transport for London. The Green Investment Bank, during its short life as a public sector entity, would have been an obvious green issuer — but was never allowed to borrow money independently. The UK's lack of public sector issuers sets it apart from France, Sweden and the US, where municipal issuers have used the green bond market.
The one oddity that therefore does stand out is the lack of green bond issuance by financial institutions.
Lloyds Bank printed a £250m four year issue in 2014, based on Lloyd’s Helping Britain Prosper Plan for measuring the societal and environmental impact in the UK of Lloyds’ business. It followed this up with a seven year trade in 2015, but has not been seen in the format since.
Barclays, RBS and Santander UK have yet to publicly discuss any green bond issuance, nor have any of the UK’s largest building societies, who issue bonds on a reasonably regular basis. UK financial institutions are lagging behind their competitors in almost all regions of the developed world in this aspect.
That doesn't mean the market is a strange to values-driven investment. There's a lively ethical bond sector in the UK, especially in the retail size bond offerings. Housing associations, charities, and other similar entities see strong demand for their deals, without requiring any certification of their socially responsible credentials.
Anglian Water don’t want investors to have to wait as long again for the next corporate green bond in sterling.
“We as a company do quite a lot of work with the Prince of Wales’ Accounting for Sustainability Project,” said Jane Pilcher, Group Treasurer for Anglian Water. “We are looking to educate and lead the way as to what corporate UK is doing regarding sustainability.”
Perhaps the market is doing better than it seemed at first. But the progress UK banks make in this area of the market will be interesting to watch. How much longer before peer pressure, client needs, and government pressure force them to join the green bond party and boost the sterling supply?