Autumn media digest: green bond indices, 1st Japan green bond, 1st Aussie, Ontario – and lots on ‘to standardize or not to standardize’

Posted: Dec 8, 2014

While October saw lots of exciting 'firsts' in the green bond market that created a media buzz, another topic that kept popping up was the discussion on ‘to standardise or not to standardise’. And after S&PDJI, Barclays/MSCI and Band of America launched their green bonds indices in November, the market started talking about green bonds going mainstream.

Below are selected articles from the last two months of media coverage. Note that we don’t include individual bonds reviews here.

Produced in cooperation with the Climate Bonds Initiative, the report includes insights from some major green bonds market players: Bank of America Merrill Lynch, TIAA-CREF Asset Management, SEB, European Investment Bank, Skanska Financial Services, Oekom research, Vigeo, Sustainalytics, MSCI, Barclays, Bloomberg New Energy Finance, Länsförsäkringar AB, Actiam and the ICMA. What’s special about it? Diverse set of contributors from virtually every side of the market makes it a comprehensive and interesting piece of reading. 

Bridget Boulle and Sean Kidney of Climate Bonds Initiative contributed an article; How standardization can help ensure that the green bonds market delivers on its potential

The autumn edition of the magazine devoted an 8-pager to a Green Bonds Roundtable discussion to which EMEA Finance invited Bahar Alsharif (IFC), Sean Kidney (CBI), Stephanie Sfakianos (BNP Paribas), Tomi Nummela (PRI), Carlos Perezgrovas (Daiwa Capital Markets Europe) and Susan Barron (Barclays). The article provides an overview of where various market players see their role in growing the market, where they think it’s going and their views on standardization. 

The joy of this year – thanks to the Green Bond Principles and the work of some pioneering banks – is that we now have a lot of banks that see the opportunity, are working at it and growing issuance. There is a shortage of supply and too much demand. An ordinary vanilla bond which is green as a bonus feature is an unbeatable proposition for investors who have publically expressed the importance of addressing climate change.

Stefanie Linhardt explores the story behind the rise of green bonds. After a brief look at the history and breakthrough deals that ‘opened the market’ she moves onto looking at some major issues facing the market after a year of dramatic growth; standards, additionally and refinancing.  The article will also give you some insight of why and how the Climate Bonds Initiative came to life!

The Climate Bond Initiative's CEO, Sean Kidney, co-founded the organisation in 2009 … “The idea behind the initiative was to find a way to channel capital quickly to achieve a rapid global transition to a low-carbon economy, so we formed an NGO and started harassing people”.

Craig McGlashan on why the ‘green’ marketing differentiator matters for a bond, where green bonds pricing is going, covered bonds, emerging markets and more.

“In the green bond space there’s a lot of untapped demand,” says Sean Kidney, CEO and Co-founder of CBI in London. “At this stage, they are mostly a marketing differentiator for issuers and that’s quite valuable a story. The corporate earmarked model, adapted from the development bank world, has only just started playing out. More than half of issuance this year has been from corporates, which means over $13bn from basically zero before November 2013. The debt capital market teams in banks are only just getting their heads around this.”

Marc Gunther wonders if green bonds can play a game-changing role in moving finance to renewable energy projects. He questions whether the emergence of green bonds brings an additionally to the market - a discussion close to many investors’ hearts. 

Proponents of green bonds say that all the buzz they are generating is, by itself, valuable because it raises awareness of green investments. Governments and businesses are making new connections with environmentally oriented investors, they say. If investors in the fixed-income market … shift even a fraction of their purchases to green bonds, they will provide new and much-needed financing for low-carbon infrastructure. (…) “In markets, momentum is everything,” says Sean Kidney, the chief executive of the Climate Bonds Initiative.

 The author concludes that after all, green is a color that Wall Street should understand.

Selected Indices coverage

FT reports on the new Barclays & MSCI green bonds index launch.

The green bond market has grown enormously in recent years,” said Sean Kidney, chief executive of the Climate Bonds Initiative.  “The availability of market standard indices is important in establishing clear, broadly accepted guidelines for the new issuers rapidly entering the market. The stature of Barclays and MSCI will help to bring attention to green bonds.

The Wall Street Journal reporter says that the increasing demand for environmentally friendly investments has been a catalyst for green-bond indices proliferation.

Corporate executives and government officials have taken note, tapping into the demand to sell about $32 billion worth of green bonds this year, up from about $10.6 billion last year and by far the most on record, according to Dealogic. The Climate Bonds Initiative, a nonprofit based in London, estimates that green-bond issuance will reach $40 billion this year and could grow to $100 billion next year.

While highlighting the role of indices in fostering market liquidity, the article offers a clear and comprehensive picture of differences between the available green bonds indices. The article quotes Sean Kidney commenting on the various inclusion criteria of the available indices:

They have to be different to get a unique selling point for sales,” says Sean Kidney CEO of NGO the Climate Bonds Initiative (CBI). “It’s all quality ice cream, but investors can still pick the flavour they want.”

Peter Cripps analyses the emergence of the new indices in the perspective of what he calls the big question hanging over the green bond market: “What is green?”

Answering this question of what is green will be key to the market’s continued success. A lot of people I speak to are thrilled by the success of the green bond market, but at the same time they are worried about its potential to implode. The main fear is that greenwashing is allowed to undermine its credibility. (...)

And more stories…

At the Reuters Global Climate Change Summit, Zurich Insurance's investment chief Cecilia Reyes called for clear definitions in the green bonds market and highlighted the risk of green washing. Reuters’ article provides some further insight. 

Proponents of green bonds hope a large and liquid market for the securities will help lower the cost of capital for projects, which will ultimately tackle climate change and other environmental issues. The problem is that no single set of criteria for what constitutes a green bond has been agreed. There are several competing versions and guidelines, and all are voluntary. Investors want independent assurance their money will go to projects that help the environment, not harm it.

“For assets that present more complicated issues, a thorough and transparent standard design process will consider these issues and indeed whether such an asset type is relevant under a low carbon economy.” the CBI has stated. “This applies … waste management … as well as to biofuel-type assets with land use complications.”

Bloomberg on first Japanese green bond issuance (Our review of the same bond in Japanese; in English).

“I’m thrilled the DBJ have taken the step because they’re cracking open the ice,” said Sean Kidney, the CEO of Climate Bonds Initiative, which estimates global green bonds sales this year will almost quadruple to a record $40 billion. “What we now need to see is a domestic issuer selling into the domestic institutional market and we firmly believe there will be significant investor appetite - but we need proof of concept.”

In its inaugural issue Clean Energy Investor talks about green bonds; an interesting, conversational style article based on an interview with the Climate Bonds Initiative CEO.

“Once we get to $100 billion, we will have a proper liquid market that is mainstream,” argues Kidney. “We don’t want green bonds to be a separate asset class. We want them to look and smell like mainstream, with use of proceeds being the only differentiator. I predict 2016 to be the year green bonds will go mainstream.”

On a gusty and raining September day in Philippines, Sean Kidney wonders if climate bonds could bridge the gap between young and capital-needy emerging markets and capital-rich again countries.

The trouble is, fast-growth projects in emerging markets looks risky - and it may be so, buffeted as they are by the winds of big economies' trade. That's where development banks and rich country aid can step in - covering the bits and pieces of risk that freak out rich countries' pension and insurance fund investors and making sure the overall projects are investible. Simple really.

Investor Statement on Green Bonds and Climate Bonds issued at the UN Climate Summit in September resonates a month later in the Financial News:

When asset owners and fund managers with combined assets of $2 trillion under management make a commitment, it carries some weight.(…)

Interesting take on the potential for green bonds financing in the emerging countries.

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. (…) 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.

An article provides an overview of the market developments with a special focus on efforts to develop the green bonds market in China.

In a posting to the Climate Bond Initiative blog, Mr Kidney said the growing trend of longer term tenor for green and climate bonds has interesting ramifications for the Chinese market, and potentially also for other economies that are concerned about the risk of market price collapses.

Climate Bonds Standard

I&PE article covers the key developments in the water industry. CDP’s recent report revealed that water shortages are seen as detrimental to growth by one-fifth of worlds companies. While green bonds are one of the ways of addressing that, the article also reports on the new expert working group set up under the Climate Bonds Standard that will develop eligibility criteria for water projects that might be backed by green bonds. 

The public consultation for the rules under which the green property investments can be certified under the Climate Bonds Standard has been completed in the end of September. While Climate Bonds Standards Board reviews the proposed set of criteria, Gordon Lane reports:

According to members of the drafting subcommittee, the goal is to provide the level of surety enjoyed by wind and solar power projects, whose greenhouse gas emission reductions can be readily quantified, to the green property sector. (…) The ongoing nature of the benefits provided by sustainable buildings make them highly suited to fundraising by means of green bonds, given that fixed income assets are generally preferred by investors with a view to the long-term.

Willow Aliento on the Water Infrastructure working group set up under the Climate Bonds Standard.

“The potential for green bonds in the water sector is enormous. While it may be tempting to define every water project as ‘green’, water investments that don’t take into account climate change, with, for example, its increased volatility of rainfall – dumps and droughts – will come to be seen as both higher risk and not consistent with green,” chief executive of the CBI Sean Kidney said.

Japan’s environmental finance watch site, reported on the latest hire by the Climate Bonds Initiative.

Also, Environmental Finance covered the recent appointment of Motoko Aizawa to Climate Bonds Initiative team as a Senior Fellow in People’s moves. Motoko will be helping us with the Standards work.

Trucost, leading environmental data provider, has recently joined the ranks of Climate Bond Standard verifiers; EF article highlights the verifiers’ key role to the green bonds standardization process.

Currently, there is no standard definition of a green bond. Verifiers are key to the market’s health because they help give investors confidence that green bonds really are ‘green’, and help to prevent greenwashing.

Well put Peter Cripps!

See also EF’s coverage of the Oekom joining the ranks of Climate Bonds Standard approved verifiers; Oekom approved as verifier of climate bonds.

Green Bonds Reports:

Climate Bonds Initiative Q3 League Table 

And finally...

Climate Spectator, Forget divestment, all capital markets are queasy on climate, Nathan Fabian 

And finally, another recommended read talks about the changing approaches of the investors community to climate risks. Written by the CEO of the Investor Group on Climate Change, a member organisation of the Climate Bond Standards Board.

 

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