With Germany agency KfW matching its green bond debut in euros with its first deal in the format in dollars earlier this week, the market for sustainable and responsible investment (SRI) bonds is maturing quickly.
Green bond issuance year to date is almost triple what it was last year. But nearly all such bond supply is coming from supranationals, developed market agencies, banks and companies. However, SRI bond experts expect plenty of supply to come once a solid investor base has developed.
There is a lot of interest from the issuer side. Borrowers in Africa, Asia and Latin America are exploring the possibility of doing deals, Emerging Markets understands.
DEMAND PROBLEM
A strong incentive for borrowers is that green bonds can boost the impact of issuers’ investor relations efforts.
“One of the challenges emerging markets issuers have is in getting investors to do their due diligence,” said Christopher Flensborg, head of sustainable products and product development at SEB in Stockholm. “A green bond is a great tool to get their attention and get them to do the work..”
The problem is demand: until this year the green bond market was dominated by issuance from top quality supranationals with triple-A ratings. Only late last year did corporate borrowers and banks begin issuing in benchmark size.
The traditional investor base of investment grade environment, social and governance (ESG) investors may take time to get comfortable with emerging market credits.
One way in which borrowers could get investors comfortable with the credit risk in emerging market bonds is for supranationals to help in the same way they help emerging market issuers access standard capital markets.
“We can help borrowers in developing markets sell a green bond in all the ways which we already help them access conventional bond markets” said Evelyn Hartwick, senior officer, client treasury solutions, Africa at the International Finance Corporation in Washington.
“Guaranteeing a first loss piece is one way, or we could be an anchor investor on a deal to give other investors confidence to come in.”
For example, issuers in Indonesia and Vietnam have expressed interest in working on green bonds, said Sean Kidney, head of Climate Bond Initiative in London, but to get these off the ground some credit enhancement would be necessary.
“We are getting many questions from our clients in emerging markets on green bonds,” said Heike Reichelt, head of investor relations and new products at the World Bank in Washington. “Most of them are on a general level, but some are more specific. Countries can consider issuing at the sovereign level or through government agencies. The World Bank can provide guidance and advisory services. Also, for their green bond ambitions, our clients would have access to the financial products that we already offer, such as our guarantee instruments.”