New shades of green bonds may push issuance to US$206b

Green bonds are starting to come in many different shades as the size of the market for securities designed to benefit the environment is on track to double again.

Those are two of the conclusions that emerged from the industry’s biggest annual gathering last week, here. Issuance might surge to US$206 billion (RM918.76 billion) this year from US$93 billion last year, according to Moody’s Corp.

As more bonds are issued by a wider variety of institution, investors are starting to track exactly how green those securities really are.

So-called dark green bonds adhere to the strictest environmental criteria, while ones described as having a lighter shade can be used to back a broader array of projects.

Financial innovation in creating new types of green bond would keep demand growing, said Michael Sheren, an adviser to the Bank of England.

“There’s about US$100 trillion of institutional money in the world and less than one per cent is invested in anything green,” said Sheren, who is co-chair of the Group of 20’s Green Finance Study Group.

“We have to make it palatable to institutional investors. Green bonds are the best instrument to do this.”

Following are other trends that emerged at the conference hosted by Climate Bonds Initiative, one of the organisations that establishes guidelines for the unregulated greenbond market:

The first covered and mortgage-backed bonds emerged last year with differing levels of greenness. This year, prices for green securities may start to command a premium to regular bonds — if metrics can justify it.

“We need to go beyond the green labelled bond market to turn the world’s infrastructure green,” said Michael Wilkins, managing director of S&P’s infrastructure ratings. “This would look at environmental impact, net benefit as well as resilience and adaptation.”

S&P Global Inc is working on an evaluation tool with a scoring system that would go beyond labeling a bond green and notgreen. It will quantify a green bond’s transparency, governance and contribution to mitigation or adaptation to climate change.

S&P is planning to introduce it in the first quarter. Two green bond exchange-traded funds have debuted. The first was by Lynxor on March 2 and listed in Luxembourg. The second was introduced four days later by VanEck Vectors. It trades on the New York Stock Exchange.

Green bonds might be linked to equities or other structures this year, said Natixis SA.

The French investment bank has created green bonds that pay out at maturity depending on the performance of an equity index instead of issuing a periodic coupon like traditional bonds do. It’s also working on green fixedincome instruments with a synthetic coupon, a structure that mimics the cash flow of a bond.

“It requires the investors to hold the bond until maturity,” said Orith Azoulay, head of SRI research at Natixis.

“We’re seeing interest from bond investors trying to get some kind of yield pickup.”

We need to go beyond the green labelled bond market to turn the world’s infrastructure green. MICHAEL WILKINS Infrastruture ratings MD, S&P Global Inc