News that Electricité de France was preparing to launch its first green bond thrilled the expanding green bond market last week. Bankers excited by this product had been longing for it to spread from public sector issuers into the corporate sector, and EDF, with its high credit quality and green credentials, seemed an ideal candidate to get things going.
But Vasakronan, Sweden’s leading property company, launched its own green bond on Monday — the last day of EDF’s roadshow — diverting some of the attention away from the French energy giant. Meanwhile, Bank of America issued its first green bond also on Monday.
Who launched the very first corporate green bond is of little interest beyond bragging rights. What matters about the Vasakronan, EDF and BofA deals is that by the end of this week there are likely to be two corporate green bonds and one private sector bank deal in issue that are recognised as green bonds by broad capital markets opinion.
You have only to look at what has happened among supranational and agency issuers to see what is likely to happen next. Where a few issuers lead, others will follow. Green bonds will become the must-have product for companies keen to trumpet their environmental credentials and bankers already brag of a number of green bond mandates up their sleeves.
Nonetheless, the green bond market is still in its infancy. The clearest proof of this is the universally accepted mantra that green bonds — whether from public sector bodies, companies or any other sector — must be priced in line with the issuer’s ordinary debt.
It is unusual in capital markets for the buy and sell sides to agree on a truce like this.
Investors are hung up on the idea that they have to demonstrate they are making the best possible returns for their clients, and that somehow this precludes them accepting a lower interest rate on a green bond than they would on the same issuer’s ordinary bonds.
Issuers, for their part, have to justify to their boards that they are not sacrificing the organisation’s cost of funds for the sake of issuing trendy green bonds.
Convenient fiction
This stand-off for the moment suits all parties involved, because it enables them to boot the market into life, overcoming institutional objections from conservative stakeholders.
But as long as it persists, the green bond market will only have the most limited economic value, and therefore value to the environment.
Green bonds should end up coming and trading tighter than ordinary debt. Part of the appeal to issuers is the investor diversification they bring. Greater demand for bonds should translate into tighter pricing.
Furthermore, investors are getting something extra from green bonds, and at the moment they are not paying for it. The credit risk is the same as for ordinary bonds, yet they also enable investors to feel they have made a green investment.
Therefore, these bonds have extra value, and issuers have often incurred extra expense to ensure the reality lives up to the green claims. That should be reflected in pricing.
When that happens, mainstream investors who don’t care about the green aspect will start to pass on them, leaving more room for the green buyers. At that point, investor diversification will also become much more real — and green projects will start to gain a financing advantage from the existence of green bonds.
Fashion rules the financial markets, and it’s time green bond investors’ mutterings about having a fiduciary duty to maximise returns went out of style. If that were the be all and end all, they would not exclude the tobacco, armaments or fossil fuel companies from buy lists.
If investors are going to have an ethical investment policy they must put their money where their mission statements are.