Green bonds gain traction as responsible investing takes centre stage

KUCHING: The year 2018 has been a year of consolidation for the green bond market as good progress has been made in the development of taxonomies and harmonisation efforts.

According to MIDF Amanah Investment Bank Bhd ( MIDF Research), clearer definitions of what is considered “green” and improved disclosure is important as it can help investors assess the market and individual bonds.

Analyst Imran Yassin Yusof in a special note yesterday said green labelled bonds issuance had been particularly strong in the past couple of years, breaching the US$ 150 billion mark in both 2017 and 2018.

The leading bond issuer in terms of size have been the US (20 per cent), followed by China (18 per cent) and France (eight per cent).

Meanwhile, Germany (five per cent) and Netherlands (four per cent) makes it the top five. The cumulative green bond issuance since 2007 until March 2019 amounted to US$ 522 billion.

“Increasingly, green bonds have been raised by corporates as issuance by corporates neared the US$ 100 billion mark in 2018,” he said in the report.

“We also noted an increasing number of global financial institutions have been aggressively raising green bonds.

“South African Nedbank first entered the market in August 2012 with a green retail offering. A variety of institutions have issued green bonds with 127 as of the end of 2018. Most issuance has been senior unsecured with covered bonds being the second most issued bond type.

“Presently, there are almost 50 dedicated green bond funds that have been set up and this includes 10 in 2018. We believe this is to respond to the increasing demand from a wide pool of investors.”

Green bonds issued in Asean’s local currency terms amounted to US$ 3.2 billion lead by Singapore (40.7 per cent), Malaysia (30.5 per cent) and Philippines (18.5 per cent).

Green bonds issued in Thai baht, Indonesian rupiah and Vietnamese dong contributed to 4.7, 4.6 and 0.8 per cents respectively.

“As for Malaysia, momentum of green financing – either sukuk or bond – has been mirrored global past two year’s trend,” the analyst observed.

“It peaked in 2017 with total issuance of RM3.2 billion, largest being Permodalan Nasional Bhd’s RM1.87 billion issue. We understand that the majority of the issuer has been for solar related project.

“We believe that there is no doubt that the demand for Green bonds and sukuk, whether from issuer or investor point of view, is real. Judging by the rapid pace of bond issuance especially in the past two years, we can dismiss Green bonds as a fad.

Although the green bond market is relatively smaller than the traditional global bond market, MIDF Research believed it has tremendous potential as governments and investors become more environmentally conscious.

With this, financial institutions will have opportunities to play a larger role especially given more issuance, in terms of number or size.

“In our view, financial institutions have a unique position in the Green bond market. It can play the role in all or separately in the three section of the value chain. Of course, financial institutions will participate as an advisor of an issuer. However, it could also become an issuer or investor of green bonds/sukuks.

“We have observed a number of global financial institutions such Credit Agricole and Citibank issuing Green bonds for green lending. Financial institutions’ treasury could also invest and trade in green bonds much like traditional bonds, especially with better proliferation of the Green bond market.

“In conclusion, we expect to see the growth of the Green bond market to continue to gather steam. We believe that it is still an infant stage of the cycle. However, it is fast maturing and financial institutions, companies and investors will need to be quick to take advantage of this growing market.”