FINANCE

Shades of Green

Bond markets are beginning to unlock climate finance

 

By Jeremy Gaunt

Weaning the world off its carbon addiction isn’t going to be cheap. The price tag for greening urban infrastructure will run in the trillions of dollars—and public money will cover only a fraction of the bill. That means that governments will need to lure private capital into the climate-mitigation arena.

On that front, Poland is leading the way. Yes, Poland. Coal-mining, ship-building, chemical-manufacturing, iron- and steel-smelting Poland.

In December 2016, it became the first country in the world to tap global financial markets for money specifically targeted at lowering its greenhouse emissions and meeting targets set by the 2015 Paris Agreement on climate change.

Welcome to the world of green bonds.

Poland raised 750 million euros for such projects as renewable-energy generation, cleaner transport, and protection of carbon dioxide–absorbing woodlands.

Source: Sovereign Green Bonds Briefing. 2018. Climate Bonds Initiative

Green bonds are now among the fastest-growing sectors in the investment world

It was not the first green bond issuer—it joined others including corporations, supranational organizations, and sub-sovereign government entities such as California and the Australian state of Victoria. But it was the first country—or “sovereign,” as the jargon goes—to test the green appetite of the $100 trillion global debt market. And it marked a mini-rush in which countries as diverse as France, Fiji, Nigeria, Belgium, and Indonesia have since joined in.

Green bonds are now among the fastest-growing sectors in the investment world, helping raise money for environmental projects and providing a solid venue for socially responsible investing.

Only $81 billion in green bonds was issued in 2016; this year the estimate is for $250 billion. The Climate Bonds Initiative, a Britain-based nonprofit that seeks to encourage green bond issuance and investment, reckons the sector will bring in around $1 trillion in 2020.

As for popularity, consider the experience of Belgium this past February. It raised 4.5 billion euros with a sovereign green bond—the top end of what it said it wanted—but only after being offered as much as 12.7 billion euros by investors. The proceeds are earmarked for new green buildings and improved energy efficiency in existing ones, renewable energy projects, and greener public and private transportation including—perhaps—financing of tax credits
for electric vehicles.

Other green bonds have been more specifically targeted. The San Francisco Public Utilities Commission, for example, has been tapping the green bond market to fund sustainable improvements to the city’s sewage system to guard against rising tides and increased rainfall related to climate change.

Corporations have also gotten into the act. Tech giant Apple has issued two green bonds for a combined $2.5 billion with the goal of reducing the company’s carbon footprint via renewable energy use and/or improved energy efficiency.

Note: shading indicated total green bonds outstanding as of March 13, 2018; numbers indicated issuance from sovereigns.
Source: Sovereign Green Bonds Briefing. 2018. Climate Bonds Initiative

And therein lies another boost to the green bond market—thwarting US President Donald Trump’s global-warming skepticism. Apple’s second foray into green bonds—a $1 billion issue announced on June 13 last year—came around two weeks after Trump pulled the country out of the Paris climate accord. Along with Apple, many US states, municipalities, and local authorities show no sign of pulling back from meeting emissions targets. The New York State Energy Research and Development Authority, for example, just raised $18.5 million in green debt.

Indeed, the current largest single issuer of green bonds is American mortgage
financer Fannie Mae. It issued $27.6 billion in green mortgage–backed securities last year, up from $3.6 billion in 2016 and just $111 million in 2015.

Booms, of course, come with growing pains. Globally, corporate green bond issuance is relatively high, but there is some concern that US corporates are put off by the danger of litigation if the exact use of proceeds is challenged.

Meanwhile, some fund managers such as Samantha Lamb, who steers the environmental, social, and governance fixed-income team at Britain’s Aberdeen Standard Investments, are wary about so-called green-washing. For example, a coal-based utility might seek to raise funds for a wind-farm project or a tobacco company to boost energy efficiency. Neither would meet strict socially responsible investment standards.

Yet the green bond sector continues to spread its web, driven by lenders and borrowers alike. Dutch pension funds, for example, are now required to show how their investments take account of environmental, climate, human-rights, and social-relation factors. There are different rules elsewhere. France, for instance, requires all pension funds to have at least one “social” option.

Sean Kidney, chief executive of the Climate Bonds Initiative, expects an increasing number of future bond issues to be tied to the Paris accord. His group is carving out a niche for itself by certifying proposed green bonds against a standard consistent with the two–degrees Celsius Paris Agreement warming limit.

Which raises the question: What, if anything, lies beyond niche status for the sector as a whole? Right now, green bonds are a drop in the $100 trillion bucket that is the world bond market. The key to becoming a more mainstream player may ironically be a kind of bond color-blindness. That is attracting investors who aren’t particularly interested in green. And here, too, there are glimmers of hope.

A Climate Bonds Initiative report on some $30 billion in green bond issuance in last year’s third quarter found that close to a half were bought by investors focused on the environment, meaning the rest were not. It also noted that overall demand in the second and third quarter was either the same or greater than that for comparable regular bonds.

With wind at their back, variety is on the menu. So far this year, green bonds have included an energy-targeted 300 million euros from Prologis European Logistics Fund; US$650 million from Chinese infrastructure financer Beijing Capital Group; A$300 million from National Australia Bank to improve housing energy use; an Islamic law–compliant SGD$1.65 billion issue from the Republic of Indonesia; and US$10 million from the Ligonier Valley (Pennsylvania) school board to green up its buildings.

Indeed, Poland itself issued a second green bond this year, making it not just  the first country to do so, but also the first country to do so twice.

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Jeremy Gaunt is an independent consultant and writer/editor based in London. He is a former Reuters specialist editor for economics and central banks.

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