Green bonds to blossom as more embrace eco-friendly investments

The growth potential for the green bonds market is considerable as budding US and European markets become more sophisticated and developing countries like India (Baa3 positive) and China (Aa3 stable) explore their use for the first time, according to Moody’s Investors Service. However, current standards and levels of accountability still leave a dent on investor confidence.

Green bonds raise capital exclusively for projects or activities with specific climate or environmental sustainability aims (e.g., renewable energy, waste management and energy efficiency).

The volume of green bonds sold in 2014 tripled to almost $37 bln from 2013, according to data from the Climate Bonds Initiative, and markets expect issuance to triple again to $100 bln in 2015. Also, in a shift that bodes well for green bond growth in developing markets, India’s Yes Bank Limited (Baa3 stable), a large commercial bank, sold the country’s first green bond in March 2015. At the same time, China’s plan to open its debt capital markets could increase access to the country’s large domestic savings’ pool and provide transformational opportunities for green bonds.

“We expect the global green bonds market to continue growing as more issuers with varying credit profiles emerge, especially as countries like China and India move towards more eco-friendly economies,” said Falk Frey, co-author of the report.

“However, while companies and municipalities issued 46% of the total last year, figures have dropped so far this year. This drop is not helped by investors’ concerns about standards and level of accountability in green bonds and corporates not seeing any pricing benefits over standard bonds,” Frey added.

Moody’s noted that investing in green bonds fits well with individual and institutional investors’ growing sustainable, responsible and impact (SRI) investing mandates, which could underpin demand going forward. SRI investing, which has grown in recent years as sensitivity to social concerns has risen, may now account for as much as 35% of professionally managed assets worldwide.

In 2014, cumulative corporate and municipal issuance of green bonds overtook development banks (46% vs. 44%), signalling a sea change since the early days of 2007 when they were only sold by development banks. This expansion in the types of issuer has resulted in a wider range of ratings for green bonds. In August 2014, the first high-yield green bonds were issued by US renewable and conventional generator NRG Yield, Inc. (Ba1 stable).

As the market develops, the number of currencies that bonds are issued in has also increased. Until 2009, bonds were denominated in either euros, US dollars or Swedish krona. Last year there were 16 different currencies including the Brazilian Real and Indonesian Rupiah.