Green bonds: firing up low-carbon transition
The Green Bonds market is not a concept anymore: this type of financing instruments of which the proceeds are dedicated to finance projects aiming to develop a more sustainable economy are now fully integrated in today’s debt capital market. The recent of € 55 million issue where Bank Degroof Petercam assisted Cofinimmo is a great example. Quick overview of this young and promising market.
65 $Bn. This is the amount of green bonds already issued in 2016. The term “green bond” is not just a trend or a concept anymore, it has become an integral part of the debt-capital market landscape. Rooted in the global movement towards a low-carbon economy, green bonds help driving more capital to climate-aligned projects, while meeting investors’ rising demand for sustainability-driven products.
Since the first issue of a green bond by the European Investment Bank in 2007, more than 150 $Bn have been issued across the globe. The rapid take-up, proven by the 2016 figures, has been driven by a strong demand momentum from institutional investors and financial institutions, and the appearance of an increasing number of specialized green bond funds.
The green bond phenomenon has captured attention worldwide, and is expanding fast. The idea is fairly simple, a green bond distinguishes itself from a regular bond by the specific use of the funds raised. The “green” label certifies that the funds raised are exclusively used to finance, or re-finance, green projects, assets, or business activities (ICMA, 2015).
This new concept has raised concerns regarding the definition and the scope of these “green-labeled” projects. Hence, to insure consistency and transparency regarding the use of green bonds proceeds, standards and criteria have started to emerge. For instance, in early 2014, market players and governing bodies have published, through the ICMA, the Green Bond Principles (“GBP”), a set of voluntary guidelines to frame the issuance of green bonds and promote integrity in the development of the Green bond market. The GBP recognize several broad categories of potential eligible projects addressing the topics of climate change, natural resource depletion, loss of biodiversity and pollution control. The list of categories includes renewable energy, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, etc.
Key figures of the green bond expansion
Although the first green bond was issued in 2007 by the European Investment Bank, it is only in 2013 that such bonds have proven trendy and have started to harvest significant proceeds. 2013 is also the year during which the market has made clear that the issuance of green bonds was not limited to large institutional banks. That year, EDF issued the first corporate green bond (€1.4Bn) to finance solar and wind energy projects, inspiring other corporate actors to follow the move.
Since then, annual figures have shown very encouraging trends. This can be shown by the following graph (Climate Bonds Initiative, Bonds and climate change : the state of the market in 2016, p6.).
On a national level, Belgium is relatively new on the scene; the first green bond was issued by Aquafin in 2015 for an amount of €45m, followed very recently by one issuance of a Green & Social Bonds by Cofinimmo in December 2016 assisted by Degroof Petercam which acted as Joint Bookrunner. There are undoubtedly more to come in the near future.
The financial characteristics of a green bond are similar to any other bond, it is a fixed-income financial instrument lasting a set period of time (“maturity”) in which the issuer commits to pay an agreed amount of interests (“coupons”) and to repay the capital (“principal”) at maturity. The only difference is the green label, testifying the issuer’s commitment to use the bond’s proceeds for projects with environmental benefits.
Regarding the pricing of green bonds, various studies and analyses have been conducted, without being able to conclude that a pricing difference exists at the time of the issue. As a matter of fact, in most cases, green bond yields were aligned to the issuer’s yield curve. It is however relevant to mention that a report from Barclays (The Cost of Being Green, September 2015) indicated the appearance of a slight premium on green bond trades (approx. 20bps) on secondary market trades. According to Barclays, this phenomenon is attributed to “opportunistic pricing based on strong demand from environmentally focused funds faced with comparatively limited green bond supply”. Having said this, additional track records and larger data are required before any conclusions can be drawn on this topic.
Along with the green bond market expansion, the need for performance tracking and benchmarking has become essential. In recent years, banks, rating agencies and service providers have launched green bond indices (4) to lower information barriers and attract mainstream investors in need of “benchmark-eligible” investments. Examples are the Bank of America Merrill Lynch Green Bond Index and the Barclays MSCI Green Bond Index.
In turn, stock exchanges have contributed to the efforts and as of today, green bonds are listed in London, Oslo, Luxembourg and Stockholm.
The key to ensure a sustainable development of the green bond market is the creation of a suited environment for both supply and demand. Market participants and policy makers should pursue their efforts into shaping a transparent and efficient environment to drive capital towards green projects (develop green definitions, set up reliable ratings, improve risk-return profile and tax incentives, etc.). Mainly based on disclosure and transparency up to now, initiatives will most likely evolve towards the establishment of true binding covenants.
Looking at the evolution of the amounts issued through green bonds, one can be optimistic about the future of this debt instrument. Main market drivers are the strong investor appetite for green bonds and the opportunity for issuers to communicate on their green projects and sustainable policies.
Such products are a meaningful step towards a sustainable economy; not only does it drive more capital towards low-carbon initiatives, it also meets an ever-increasing demand for green-labeled products.
 OECD Report, Green bonds, mobilizing the debt-capital market for a low-carbon transition, p7, 2016.