NRW.Bank launched its second green bond last week, and achieved a notable first. Not only was the bond priced through its secondary curve, but an investment banker at one of the leads was willing to go on the record as saying so.
PJ Bye, global head of SSA syndicate at HSBC, was unequivocal: the green use of proceeds had made this possible.
This has happened on corporate green bonds before, but never in the SSA market, and breaks an important taboo.
To foster the green bond market, many participants had clung to the idea that green bonds should price in line with ordinary ones, even though they clearly offer investors extra (non-monetary) value and win additional demand.
The fiction could not last, and it is good that it is weakening. Any ethical choice in investing involves limiting one’s potential scope for return — though not necessarily shaving actual returns.
It is bogus of investors to pretend otherwise — and unnecessary. Their clients are quite grown-up enough to understand that investing in green projects involves a choice, and that might have a modest cost. As it was an SSA deal, the amount paid by NRW.Bank’s investors was an almost invisible 2bp.
Bigger numbers are at stake in Norway, where the sovereign wealth fund is considering how far to go in implementing a green investment policy. Should it sell out of tar sands and coal companies — or go the whole hog and disinvest from fossil fuels altogether?
The choice is an important one, as Norway’s fund is one of the world’s largest investors. That Norway is publicly debating the trade-off between investment freedom and a green approach to investing sets an extremely healthy example for the capital markets.
Waving the green flag
Despite timid bankers’ anxieties about preferential pricing stifling the market, green bond issuance goes from strength to strength.
This week Bank of America Merrill Lynch launched its Green Bond Index; Barclays and MSCI plan to launch their equivalent product this month. These are the third and fourth indices for this fast-growing market, after benchmarks from Solactive and Standard & Poor’s.
According to BAML’s figures, there are now $32bn of green bonds from 29 issuers, with an average yield of 1.4% and average rating of Aa2.
But although green bonds are helping to educate and enthuse investors — and beginning to make them wrestle with tricky issues like whether they should accept lower returns — it is essential to remember that green bonds remain essentially a marketing and categorising tool.
NRW.Bank, the European Investment Bank, World Bank and Electricité de France, with their green bonds, are creating links between their bond investors and specific parts of their activities. Those links have value in raising awareness and engagement —but they don’t cause any new wind farms to be built.
Hawaii’s cunning model
The real cutting edge of green finance is elsewhere — and there were two notable advances last week.
The State of Hawaii is preparing to launch a $150m bond to finance loans for low and moderate income householders and charities to install solar panels and other green energy equipment.
Cleverly, the state has obliged all electricity customers to pay a fixed levy through their power bills, which will be securitized with the bond. The charges are not linked to power use, so constitute an almost perfectly low risk securitization asset class — the only way to avoid paying is to cease receiving electricity. The bonds will therefore be triple-A.
Everyone pays the charge, but only those who can be bothered to install solar panels will benefit from the cheap financing — a powerful incentive to do so.
Utility seeks third party equity
Back in Europe, EDF announced an unusual joint venture with Amundi, Europe’s largest asset manager. It will be a sort of private equity firm, specialising mainly in renewable energy and energy efficiency.
The vehicle will raise third party equity, with an initial target of €1.5bn, to finance projects that EDF has designed, but lacks the balance sheet capacity to put into action. Other companies’ projects could be financed, too.
Since EDF is not going to issue fresh share capital, this is a way for institutional and retail investors to give it capital to build more green plants and install energy-saving devices.
Green bonds are great for stimulating thought — but thought has to lead to action, and that means making green development happen that otherwise would not happen.
Neither Hawaii’s nor EDF’s schemes have come to fruition yet, but both are innovative financing mechanisms to bring about tangible changes in the real world.