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

New Straits Times - - Business -

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

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