Green bond markets in corporate bloom
The growth of corporate issuance in the green bond market is a compelling trend in modern capital markets. While this growth will continue, market entrants must pay heed to the market’s unique demands, say Antonio Keglevich, head of green bond origination, and Robert Vielhaber, green bond analyst at UniCredit
The green bond market has gone from strength to strength in recent years, but perhaps most impressive has been the growth of corporate issuance. Following the first corporate benchmark green bond from French utility EDF in November 2013, corporates accounted for $12bn of new issuance in 2014. This figure has already been met this year, with more expected in the coming months.
We predict that the increasingly broad applications of green bond criteria will see a growing number of corporates from a range of different sectors enter the market in coming years, for the simple reason that green bonds provide a straightforward way of funding environmentally responsible projects.While this may not meet the optimistic estimates for growth issued this time last year —the Climate Bonds Initiative estimated that total new issuance would increase to between $100bn-$150bn for example — we certainly expect the market to continue growing. As one of the joint lead managers on the very first green bond, issued by the European Investment Bank in 2007, we are excited to see the market bloom.
Aside from the more obvious candidates such as the energy and utility sectors, we also expect green bond issuance from the food, automotive, transportation and housing industries — to name just a few. And much of this growth will be driven by new investment demand from an increasingly environmentally-conscious public.
Of course, market entrants must be careful to avoid “green washing” — for example, raising funds for a supposed environmentally-friendly investment and using them for other purposes, or obtaining a spurious green lustre from issuing a green bond, while continuing to behave poorly towards the environment in their other activities. Such duplicity risks undermining the reputation of the market in general, not least the company involved. This is one of the biggest risks that could deter the current growth of demand for the asset class.
Demand driven by investors
Ultimately, investment demand is growing because awareness of climate change is growing. Ordinary investors want their asset managers and pension funds to dedicate a part of their portfolio to green assets. And, crucially, at the moment this does not come at the expense of yield.
As such, many investors are beginning to realise that green bonds offer significant upside through full transparency of the underlying assets. While some have aired concerns about liquidity, these concerns do not apply to many of the large issuers in the market and a long list of investors have committed to increasing their allocations accordingly.
This demand has so far been concentrated in France, the Netherlands, the Nordic region and Switzerland. Investors in these countries are among the most environmentally-conscious in the world — but we anticipate that demand for green bonds will increase across the global financial system alongside the growing concerns for the environment.
Incentives for issuance
This growing demand is not going unnoticed by corporates, who are keen to address the availability of that money. While corporates must be careful to avoid “greenwashing” there is significant potential for more companies to enter the green bond market in coming years.
For a start, corporates see green bonds as an effective way of communicating their green credentials. But, more importantly, a growing number of companies face increasing internal stakeholder pressure to develop green credentials. And green bonds are a simple way of funding environmentally responsible investments.
Most obviously, some utilities are shifting from coal or nuclear production of energy to renewable assets, using green bonds to finance these investments. Perhaps less obviously, public transport firms such as Transport for London and the Paris Metro (Ile de France) have issued green bonds to fund investments into their core activities.
Because public transportation is kinder to the environment than personal transportation, investments in these areas meet green bond criteria easily. Importantly, green bond criteria do not demand that investments are completely carbon neutral — they must only result in improvements on current emissions.
This opens the door for a huge number of applications. For instance, many companies could issue green bonds to finance more energy-efficient offices by the wholesale conversion to more efficient light bulbs.
However, this trend highlights a disagreement in the green bond community. One school of thought suggests that every green bond issuer should be environmentally-friendly in all of its operations. Another says that only the investments directly related to the green bond issuance in question are important — a view we share.
A market built on reputation
It is certainly important for green bonds — and the investments they fund — to be restricted to environmentally-friendly applications. But overly stringent rules risk shutting out swathes of corporates from the market, obstructing its sustainability and — more importantly — the potential benefits to the environment.
That said, the risk of "greenwashing" is significant and should not be dismissed. A single scandal, if sufficiently prominent, could damage the reputation of the entire market, never mind the company involved.
It may also be a limiting factor to growth. Some companies or issuers may shy away from issuing green bonds because any negative news could leave them open to charges of hypocrisy. While this is an important risk to the green bond market’s continued growth and sustainability, the growing investment appetite and broad applications of criteria provide sufficiently formidable incentives to overcome it. In our view, these factors will continue to stimulate new levels of growth in 2016 and beyond.