Many people may have heard about green bonds but in reality, very few fully understand what they are. In simple terms, a green bond is a debt issuance with the proceeds earmarked to fund projects that provide climate or environmental benefits. The obligation is backed by the issuer’s balance sheet.
Green bonds have gained popularity as the world focuses more on climate change. Issuances doubled between 2015 and 2016 and were on track to double again by the end of 2017. At present, there are c. £110 billion of outstanding green bonds in the market and c. 75% of all issuances have a credit rating of A- or better (as per Sustainalytics credit rating). Countries, municipalities and corporates increasingly want to use this type of product to help fund their carbon-reduction targets.
Green bonds are attractive for investors across the spectrum. For mainstream investors they can offer attractive rates of return. For sustainability mandates, green bonds provide an accessible way to invest in low-carbon assets. For issuers, green bonds provide a clear signal to the market that they are focusing on climate change.
The supply of green bonds is set to increase as they represent a valuable tool to mobilise global investment in low-carbon infrastructure. This is a truly global trend with China having made 39% of all green bond issuances in 2016. Poland was the first country to issue a green sovereign bond, with a €750 million issuance in December 2016 financing a range of climate-related projects, including renewable energy generation and clean transportation. Poland generates more than 80% of its electricity from coal. This hopefully highlights that even fossil fuel-reliant countries are planning for the future.
Given the green bond market is in its infancy, rules as to what constitutes a green bond can be ambiguous. It is also important to look carefully at the use of the proceeds when contemplating investing in an issuance. A country or company’s overall long-term strategic direction must be aligned with the mission of its Green Bond otherwise what is the point? Sadly, this is not necessarily the case for some of the countries mentioned above. It is undeniable that as an increasing number of Green Bonds are issued and issuers become more familiar with investor expectations, the long-term impact on the world will be greener.
SOURCE: MORGAN STANLEY RESEARCH – GREEN IS GOOD, 21st SEPTEMBER 2017