Green bond boom brings grow­ing pains

The Star (St. Lucia) - Business Week - - FRONT PAGE - BY FT EN­ERGY COR­RE­SPON­DENT

A €600m bond sold by a Scot­tish util­ity would not nor­mally set pulses rac­ing for any­one but the most com­mit­ted fol­low­ers of Lon­don’s debt market.

A €600m bond sold by a Scot­tish util­ity would not nor­mally set pulses rac­ing for any­one but the most com­mit­ted fol­low­ers of Lon­don’s debt market.

Yet, just such a fundrais­ing by SSE plc last month at­tracted at­ten­tion as a sign of grow­ing mo­men­tum be­hind so-called green fi­nance. SSE’s was the largest bond so far is­sued by a UK com­pany with an of­fi­cial “green” la­bel at­tached, adding to the global growth in fi­nanc­ing ringfenced for projects which ben­e­fit the en­vi­ron­ment.

Less than a decade old, the green bond market raised $95bn last year and is on track to reach is­suance of $123bn this year, ac­cord­ing to Bloomberg New En­ergy Fi­nance. That re­mains a tiny frac­tion of the over­all debt market but its ex­pan­sion is forc­ing main­stream in­vestors and is­suers to take no­tice.

“More and more fund man­agers are di­ver­si­fy­ing their in­vest­ment cri­te­ria to in­clude green fac­tors,” says Gre­gor Alexan­der, SSE fi­nance di­rec­tor. “Not ev­ery bond will be green, but it will be­come part of our menu of op­tions.”

To qual­ify for the green la­bel, all bond pro­ceeds must be com­mit­ted to en­vi­ron­men­tally friendly projects, such as re­new­able power, en­ergy ef­fi­cient build­ings and low-car­bon trans­port. SSE, for ex­am­ple, is us­ing its bond to re­fi­nance ex­ist­ing on­shore wind farms.

Euro­pean util­i­ties Iber­drola, EDF and Engie are among oth­ers to have en­tered the market and France in Jan­uary be­came the largest sov­er­eign is­suer, rais­ing €7bn.

Green bonds have be­come one of the main out­lets for a grow­ing pool of in­ter­na­tional cap­i­tal which comes with en­vi­ron­men­tal or eth­i­cal strings at­tached.

Ja­pan’s Govern­ment Pen­sion In­vest­ment Fund, for ex­am­ple, has a tar­get to move 10 per cent of its $1.3tn of as­sets into in­vest­ments meet­ing cer­tain en­vi­ron­men­tal, so­cial and gover­nance (ESG) stan­dards.

An es­ti­mated $10.4tn of as­sets world­wide in­volve some form of ESG mea­sure­ment, ac­cord­ing to the Global Sus­tain­able In­vest­ment Al­liance, an in­crease of 38 per cent from 2014.

Of­ten dis­missed in the past as a woolly con­cept driven more by pub­lic re­la­tions than re­turns for in­vestors, sus­tain­able fi­nance is be­ing forced into the main­stream by two forces.

The first is po­lit­i­cal and reg­u­la­tory pres­sure re­lated to global ac­tion against cli­mate change. France in 2015 be­came the first coun­try to in­tro­duce manda­tory en­vi­ron­men­tal re­port­ing for fi­nan­cial in­sti­tu­tions, com­pelling fund man­agers to dis­close how they con­sider green performance when mak­ing in­vest­ment de­ci­sions.

“Any in­sti­tu­tion or com­pany that wants ex­po­sure to France now has to think about this and that is mak­ing a big im­pact glob­ally,” says Zoe Knight, head of HSBC’s Cen­tre for Sus­tain­able Fi­nance.

The sec­ond and ar­guably most pow­er­ful cat­a­lyst is the grow­ing fi­nan­cial ap­peal of green in­vest­ment as clean tech­nol­ogy, such as wind and so­lar power, ma­tures.

The World Bank’s In­ter­na­tional Fi­nance Cor­po­ra­tion has es­ti­mated that $23tn of in­vest­ment will be needed be­tween 2016 and 2030 to de­liver the cuts in car­bon emis­sions en­vis­aged un­der the Paris cli­mate agree­ment.

There are clear signs of this cap­i­tal be­gin­ning to ma­te­ri­alise, whether in the ac­cel­er­at­ing shift by com­pa­nies such as SSE from coal-fired power gen­er­a­tion to re­new­ables, or ris­ing in­vest­ment by car com­pa­nies in elec­tric ve­hi­cles.

Green bonds look poised to play an im­por­tant role in fi­nanc­ing the tran­si­tion but the market is not with­out prob­lems. There is no agreed global stan­dard for what qual­i­fies as a “green” pro­ject, nor for the dis­clo­sures re­quired of is­suers to mea­sure en­vi­ron­men­tal performance.

This has led to con­tro­versy over whether tra­di­tional en­ergy com­pa­nies should be al­lowed to claim green cre­den­tials for bonds aimed at re­duc­ing emis­sions rather than elim­i­nat­ing them al­to­gether.

Rep­sol of Spain be­came the first oil and gas com­pany to is­sue a green bond in May, rais­ing €500m to make its re­finer­ies and other in­fra­struc­ture more ef­fi­cient.

The bond was backed by re­search from Vi­geo Eiris, the Paris-based en­vi­ron­men­tal rat­ings com­pany, show­ing that Rep­sol’s in­vest­ments would avoid 1.9m tonnes of an­nual green­house gas emis­sions — equiv­a­lent to tak­ing 400,000 cars off the road.

How­ever, the bond was ex­cluded from most of the indices which track green debt.

Ni­cholas Pfaff, se­nior di­rec­tor of market prac­tice and reg­u­la­tory pol­icy at the In­ter­na­tional Cap­i­tal Mar­kets As­so­ci­a­tion, says there will be dif­fer­ent “shades of green” as the market evolves. It will be up to in­vestors to de­cide how pure they want their green port­fo­lios to be.

De­mand for green bonds has so far out­stripped sup­ply, al­low­ing is­suers to price them at a pre­mium. SSE’s eight-year green bond was al­most three-times over­sub­scribed, re­sult­ing in the com­pany’s low­est ever coupon for a se­nior bond at 0.875 per cent.

Liq­uid­ity is grad­u­ally in­creas­ing, with Chi­nese is­suers prom­i­nent, but the market re­mains mainly buy-to-hold. “The big­gest risk is to­kenism,” says Mr Pfaff. “It is very im­por­tant that is­suers un­der­stand that they are sig­nalling the tran­si­tion of their busi­ness mod­els. It should not just be a one-off.”

Sher­ing­ham Shoa Wind Farm

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