Market for ‘green’ bonds heats up
TD expects further growth to come from corporate issuers and governments
This year is shaping up to be a big one for the green bond, as global issues of the environmentally friendly debt are expected to increase to US$160 billion in 2018, according to TD Securities.
The forecast figure would be a 34-per-cent gain over last, given TD’s calculation of US$119 billion in green bonds brought to market in 2017.
“The sector has experienced extremely strong growth over the past several years as funds with socially responsible mandates continued to chase scarce supply,” TD analyst Gennadiy Goldberg said this week in a research report.
Goldberg also noted the rise of the green bond has happened in spite of President Donald Trump declaring last June that the United States would pull out of the Paris climate accord, or COP21, “suggesting that fundamentals rather than politics are behind the growth in the green bond space.”
Green bonds can be used to help fund a variety of initiatives with environmentally friendly mandates, such as renewable energy or transit projects. The securities have grown more prominent in recent years as some companies, governments and investors have taken a more climate-focused tack.
“It’s a hot bond market, but greens are even hotter,” said Sean Kidney, chief executive and cofounder of the Climate Bonds Initiative, a not-for-profit organization that promotes green investments.
Kidney said his organization estimates total green bond issuance in 2017 was just under US$130 billion, and that they expect at least 60-per-cent growth on top of that in 2018, which would be more than US$200 billion in issuance. The growth, he added, is in part being driven by institutional investors pouring into the market for green bonds, which Kidney said are essentially comparable to other bonds.
“But they’ve got a bonus feature, which is the proceeds go to support the transition to a low-carbon economy,” he said.
TD said it expects further growth in green bonds to come from several sources, particularly corporate issuers.
“We believe corporate green bond supply is rising as consumers continue to pressure companies to be more socially responsible — a trend we expect to continue,” the note added.
TD Bank Group, which touts itself as the first Canadian bank to issue a green bond, said in December that it was targeting $100 billion in low-carbon lending, financing, asset management and other programs by 2030.
Toby Heaps, chief executive of research firm Corporate Knights, said green bonds offer issuers a broader pool of potential investors, some of whom may be willing to take a “small haircut” on their returns.
“As an issuer, you can save a few points in terms of what you’ve got to pay to raise your money,” Heaps said. “It’s a legitimate step forward to the green economy, not a sort of PR step.”
Governments are trafficking more in green bonds as well, with TD predicting their involvement in the space will continue to increase. France conducted its firstever issue last year, which “sharply increased the extent of government involvement in the green bond space,” TD said. Belgium, meanwhile, is reportedly plotting a green bond issue of its own for the first quarter of 2018.
Even some sub-sovereign Canadian governments have gotten in on the action. Ontario issued its third green bond in February 2017, raising $800 million to fund a variety of projects, including improvement to commuter train services in the Greater Toronto Area. The province said in a December newsletter that it was planning on its fourth green bond issue before the end of fiscal 2017-18.
Canada, though, has yet to launch a sovereign green bond of its own.
“We need a bit of sovereign support here, to provide liquidity in the Canadian dollar market,” Kidney said.
But the market is growing, with or without Canada. And Heaps said the inclusion of climate-aligned bonds — bonds that are not specifically labelled “green,” but are issued by public transit authorities and renewable power companies, among others — could see the issuances exceed $500 billion.
“The capital markets were missing in action for a long time,” Heaps said. “When they show up, they show up in a big way.”