Green bonds: Com­ing of age

Kuwait Times - - BUSINESS - By Gor­don French

The green bond mar­ket turns ten years old this year and is rapidly head­ing to­wards adult­hood. As it comes of age, this mar­ket will be an in­creas­ingly crit­i­cal source of cap­i­tal for projects that will help the global econ­omy limit the im­pact of cli­mate change.

It’s not been an en­tirely easy child­hood so far. The first-ever “green bond,” a EUR 600 mil­lion is­sue in July 2007 , was fol­lowed by, well, not very much in the same vein for sev­eral years. It took un­til 2013 for green bond is­suance to vault the $10-bil­lion-a-year mark — and even that is a tiny amount com­pared with the over­all bond mar­ket.

Ten years on, how­ever, the baby of the cap­i­tal mar­kets has grown spec­tac­u­larly. Over $90 bil­lion was raised via green bonds last year - more than dou­ble the 2015 amount. That in­cluded the first ever sovereign green bond, a EUR 750 mil­lion is­sue by Poland. And in Jan­uary this year, France is­sued a EUR 7 bil­lion, 22year green bond - a mile­stone in terms of its size and long tenor and all the more re­mark­able be­cause in­vestor de­mand, at more than EUR 23 bil­lion, far out­stripped the size of the of­fer­ing.

Cli­mate change is an ur­gent threat to the planet, and ma­jor in­jec­tions of cap­i­tal are re­quired to fi­nance less car­bon-in­ten­sive tech­nolo­gies and in­fra­struc­ture. Think wind tur­bines and so­laren­ergy farms. Think low-car­bon trans­port sys­tems. Think tech­nolo­gies that will make build­ings - and en­tire cities-ever more en­ergy- and wa­ter-ef­fi­cient.

The green bond mar­ket may be a late de­vel­oper, but it is now crit­i­cal to fi­nanc­ing a lower car­bon econ­omy. It en­ables com­pa­nies to tap the grow­ing pool of cash glob­ally that is look­ing for cli­mate-friendly in­vest­ment op­por­tu­ni­ties, con­vert­ing those funds into cap­i­tal for en­vi­ron­men­tally sus­tain­able projects.

At present, green bonds still ac­count for less than 1 per­cent of the over­all global bond mar­ket. But here’s why we be­lieve the mar­ket is rapidly grow­ing up:

First, there have been pro­found changes in the way busi­nesses, con­sumers and in­vestors per­ceive the risks stem­ming from pol­lu­tion and ris­ing global tem­per­a­tures. The 2015 Paris Agree­ment es­tab­lished an over­whelm­ing global con­sen­sus on the need to ad­dress cli­mate change. It re­quired the nearly 200 sig­na­to­ries to de­velop their own na­tional plans to meet the tar­get of lim­it­ing the in­crease in global tem­per­a­tures to two de­grees Cel­sius or less over pre-in­dus­trial times. This has gal­va­nized global green-tech in­vest­ments and fi­nanc­ing.

Sec­ond, tech­no­log­i­cal ad­vances are mak­ing more and more low-car­bon al­ter­na­tives (from al­ter­na­tive en­ergy tech­nolo­gies, to elec­tric ve­hi­cles and bat­ter­ies) eco­nom­i­cally vi­able. Green in­vest­ments are in­creas­ingly not just eth­i­cally but also fi­nan­cially sound. Third, the author­i­ties in China and In­dia have thrown their con­sid­er­able weight be­hind ef­forts to green their economies. By launch­ing green bonds for the first time in 2015, Chi­nese and In­dian in­sti­tu­tions added ge­o­graph­i­cal di­ver­sity to a mar­ket that had un­til then been dom­i­nated by the likes of Scan­di­navia, the United States and Bri­tain. Last year, more than $33 bil­lion­worth of Chi­nese green bonds were is­sued. That’s over onethird of the global to­tal - and up from just $1 bil­lion in 2015. In­dian vol­umes are more mod­est, at just over $1 bil­lion last year, but the coun­try is like­wise go­ing through a par­a­digm shift in low-car­bon tech­nolo­gies.

The in­creas­ing mo­men­tum be­hind green bonds means is­suers and in­vestors can no longer af­ford to ig­nore them.

True, there is lin­ger­ing skep­ti­cism over the “green­ness” of spe­cific bonds. Are pro­ceeds re­ally de­ployed to fi­nance cli­mate-re­lated or en­vi­ron­men­tal projects? Or are they headed to­wards projects or com­pa­nies whose “green­ness” is de­bat­able? Who as­sesses whether a par­tic­u­lar is­sue is as “green” as an­other? Many in­vestors are still put off by the lack of con­sis­tency and trans­parency on those fronts, while is­suers shy away from the ex­tra ef­forts (and costs) of dis­clos­ing, re­port­ing and cer­ti­fy­ing “green” ven­tures.

But the ex­tras tend to be over­es­ti­mated, and progress is be­ing made on stan­dard­iza­tion and mon­i­tor­ing. For ex­am­ple, Stan­dard & Poor’s in April launched a tool de­signed to eval­u­ate not just whether a bond is green, but how green it is. Mean­while, the ad­van­tages of is­su­ing a green bond are sub­stan­tial - though per­haps not yet as widely rec­og­nized as they should be.

For a start, is­su­ing green bonds al­lows com­pa­nies to tap the grow­ing de­mand for such in­stru­ments among pen­sion funds, sovereign wealth funds and other in­vestors who are con­cerned about their port­fo­lios’ ex­po­sure to high-car­bon and un­sus­tain­able is­suers and ac­tiv­i­ties. As of early 2016, there were some $23 tril­lion of as­sets pro­fes­sion­ally man­aged un­der re­spon­si­ble in­vest­ment strate­gies. That’s up 25 per­cent since 2014, and rep­re­sents more than a quar­ter of all pro­fes­sion­ally-man­aged as­sets glob­ally. Like­wise, a re­cent HSBC sur­vey found that two-thirds of global in­sti­tu­tional in­vestors want to put more cap­i­tal into low­car­bon and cli­mate-re­lated in­vest­ments.

What’s more, the launch of a green bond al­lows an is­suer to demon­strate they are aware of and pre­par­ing for the long-term chal­lenges of global warm­ing. And, by re­quir­ing them to iden­tify, min­i­mize and mon­i­tor their cli­mate risk pro­file, it can help them em­bed low-car­bon think­ing in their cor­po­rate cul­ture and busi­ness strat­egy. Over the long term, this could well create an ad­van­tage over less well-pre­pared com­pa­nies in terms of val­u­a­tion and busi­ness prospects.

Given what’s at stake, the green bond mar­ket’s com­ing-of-age can only be wel­come. Happy 10th birth­day. *Note: Gor­don French is Head of Global Bank­ing and Mar­kets, Asia Pa­cific, HSBC.

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