After more than a decade, it appears green bonds are finally taking root.
So far this year, countries, companies and local governments across the globe have sold about $89 billion of bonds to fund projects that are good for the environment, data compiled by Bloomberg show. Bloomberg Intelligence analyst Jaimin Patel estimates the current run rate will put global non-asset-backed green bond issuance at more than $182 billion for the year, which would easily top 2018’s $133 billion and 2017’s $128 billion. More important, it looks as if the market is returning to steeper growth after last year’s stagnation.
To be clear, the Climate Bonds Initiative’s stated goal of $1 trillion in yearly green-bond issuance remains a ways off. But 2019 has brought signs that it’s not just a pipe dream. May’s $23.8 billion was the second-highest monthly volume on record. Those who borrowed last month included the Netherlands, whose 5.98 billion euro ($6.7 billion) deal represented the first sovereign green bond ever sold by a triple-A rated country, according to Moody’s Investors Service. And it’s not just that issuers are stepping up — investors are, too. The Netherlands’ order book swelled to 21.2 billion euros in less than two hours.
Nor is the green-bond wave showing any signs of cresting. Just this week, issuers on three continents laid out plans to borrow: Chile brought a 30-year green deal to market, Korea Electric Power Corp. priced $500 million of five-year securities, and EDP Finance B.V., a Portuguese issuer with ratings one step above junk, set up investor calls for its green-bond debut. And that doesn’t even include Connecticut, which plans to issue $250 million of top-rated green bonds for water and wastewater projects.
Speaking of Connecticut, its two U.S. senators, Chris Murphy and Richard Blumenthal, are among the five Democrats who last month introduced legislation that would create a United States Green Bank. They would capitalize it “with up to $50 billion as a wholly-owned corporation of the United States government, under the direction of the Secretary of the Treasury.” It would “finance clean energy projects by capitalizing regional, state and local intermediary institutions (e.g. state Green Banks), which then directly finance eligible projects.”
The likelihood that proposal goes anywhere, given the current makeup of Washington, is probably slim at best. But it speaks to a broader feeling that green bonds are more than just a clever marketing gimmick — they’re here for good, and investors and issuers alike ought to start planning accordingly. In one example, a panel of experts on sustainable financing appointed by the Canadian government released a report last week that said green bonds should have tax breaks like U.S. municipal debt to create a more well-functioning market.
This sort of growth and widening acceptance was by no means inevitable. Just a year ago, I wrote that the green-bond market appeared to be stuck in infancy because of self-designating and a general lack of enforcement. And, indeed, last year’s offerings pointed toward a market that was plateauing even though the existential threat of climate change was put in stark relief by the United Nations.
It’s not entirely clear what changed. Maybe countries and companies truly are reacting to the U.N.’s October report, which argued that the world has 12 years to avert catastrophic climate damage, and just needed time to get their financing in order. Regardless, the diversity of borrowers coming to market stands out as an important trend. About 39% of issuance in the first five months of 2019 came from countries other than China, France, the U.S., Germany, the Netherlands and Sweden, the most since at least 2014, Bloomberg data show. According to Patel, this is “important to ensuring the stability of longer-term growth in the green bond market, while limiting the impact of one-time spikes by established issuers.”
Before declaring that bond investors are saving the world, remember that details matter in these deals. There’s still no catch-all for the green-bond market, which is clear from looking at the Climate Bonds Initiative’s website. As of June 17, it shows $90 billion of 2019 issuance, divided into $69.5 billion of “labeled green bonds aligned with CBI definitions” and $20.5 billion of “Certified Climate Bonds.” Excluded from that total is another $22.2 billion of “labeled green bonds not aligned with CBI definitions.”(1) It’s useful and transparent that the group breaks it out like that, but that’s still a sizable amount of debt that in some ways is green in name only.
CBI’s own estimate for 2019 green-bond sales is $250 billion, or an almost 50% increase from last year. That’s impressive for a market that several years ago was little more than a novelty and represents a return to the rapid growth that characterized pretty much every period except 2018.
My hunch is the steady drumbeat of climate change has become loud enough to persuade countries and companies to look beyond the short term when preparing to borrow. Yes, it’s extra work for issuers to verify every year that they adhere to a set of principles, but that’s likely the most onerous during the first go-round. For institutions with the largest amount of green bonds outstanding, like the European Investment Bank, France and KfW (the German state-owned development bank), economies of scale come into play.
Call it a comeback for green bonds. The uptick in debut issuers, in particular, suggests that environmentally friendly financing might finally be sinking its roots into the global debt markets.
(1) According to CBI, this has to do with guidelines from the People’s Bank of China on green bonds that don't conform with the Climate Bonds Initiative's taxonomy. It includes debt that funds upgrades to coal-fired power stations and large hydropower electricity generation, along with securities with more than 10% of proceeds allocated to 'general corporate purposes.'
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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