Given the buzz around SRI deals — and green bonds in particular — it is unsurprising that SSA borrowers are lining up to join the market, claiming that SRI principles underlie everything they do.
In the case of the development banks, that is easy enough to believe. Those institutions have a specific mandate to support sustainable development and asset pools big enough to raise industrial-scale green financing against.
But away from these borrowers, it is less clear what the advantage and credibility of a green bond is. Municipal funding agencies have insisted they are looking to play in the green bond market, as are export guarantee agencies.
Here the waters are a little muddier. It is hard to imagine many municipal financing agencies with asset pools chock full of the sort of loans that SRI investors want to help finance.
It is similarly muddy when considering claims from an export guarantee agency that a green bond will support capital intensive projects — such as those from rail and aerospace manufacturers — on the grounds that they may ultimately take cars off of the road.
There are also enough people in the SSA market that suspect this is a market based on greenwash and that the thorny problem of what counts as SRI in the first place, and how themed bonds should be priced and allocated, are too complicated for the market ever to take off.
But the fact is that there are trillions of dollars of assets looking for an SRI home. Issuers will find ways to access that money and it is good that they do.
In the meantime, this market needs to start small. Green bonds from supranationals are an ideal place to start. They are all but devoid of credit risk and they are vanilla instruments. In other words, they are just the sort of product that has kick-started all manner of other bond markets.
The supranationals have a big enough footprint with investors and in terms of the projects they finance to justify large, green deals. They also have the ideal set-up and resources to handle the accreditation process while it is still being refined — something that the rest of the issuer universe can then adapt.
Critics that hammer the SRI market because it sounds like the right thing to do are just as premature as those borrowers that are aiming to jump on the bandwagon because it sounds like the right thing to do. The market needs to bed down and take root with the supras. Only then will the SRI bond market be able to root deep enough to sustain its own growth.