It’s been a crazy month for “labelled”* green bonds. At the beginning of the month, there was approximately $10bn outstanding (just under $13bn has been issued but some matured) consisting of mostly of AAA multi-lateral development banks and (depending on how you count) a few municipalities.
Now, as November closes, we’re looking at approximately $15bn outstanding with the first few corporate issuances released! One month on and it’s a different world. Here is a brief summary:
- Labelled green/climate bonds market grows by 50%
- 8 bonds issued in November– 7 over the magic $300m mark
- First corporate green bonds issued: 3 in one week!
- Demand is HUGE – most bonds were oversubscribed.
- Biggest green bond ever issued – EDF with EUR1.4bn ($1.9bn)
BUT...
- 2 bonds issued without 3rd party standards/certification
- Houston we have a problem with Standards!
- Refinancing vs new assets – some of the bonds
FYR: what’s the diff between climate and green bonds?
- Climate bonds are those where funds are linked to assets that contribute to a rapid transition to a low-carbon and climate resilient economy. There are some $350 billion outstanding globally, of which $28 billion are renewable energy bonds.
- Green Bonds are corporate-style bonds where funds are ring-fenced for green - largely climate - projects. There were some $15 billion outstanding at the end of last month. They are included in our annual market report on Bonds and Climate Change.
So, it’s been a busy month and the growth is fantastic to get capital flowing. The explosion has shown just how much demand there is out there with most bonds oversubscribed, some several times over. The big game changer has been the entrance of corporate into the space – we’ve been saying for a long time that while MDB issuance is great, the big capital shifts will come when corporates get involved – first by issuing corporate asset-linked bonds and later down the line asset-backed securities. We hope that this is the start of a trend.
Another notable feature is the mix between bonds for refinancing of existing assets vs the financing of new asset. There’s been a bit of debate about whether investors want only new assets (EDF) or to finance existing assets (NRW, Vasakronan). The fact that investor demand has not discriminated between types shows that, at this stage, investors are happy with both. This is good news from our point of view, although refi might not be as sexy, we’ve long been saying that refinance is essential part of the financing pipeline. It allows banks to get loans off their books and lend more – the easier the loans are to offload, the more likely they are to make more of them. It also allows institutional investors to take part in the market post-construction phase when the risks are much reduced.
With such fast growth, however, there is also a risk that the market gets ahead of itself, forgets about standards and greenwash prevails. In our view, the best way to avoid greenwash is to have very clear, public standards in place that each bond can be certified against (by a credible third party).
Our view is that even trusted organisations need to use recognised standards to identify which projects are ‘green’. For the trusted issuers, the issue is
less about whether the money goes to the stated investment area as it is about whether the stated investments are green in the first place. Even the World Bank understands that having third party review bolsters their case – a fact they have recognized in their use of third parties to review inclusion criteria.
As the market expands from trusted development banks towards corporates, then money needs to be tracked and that’s when bonds need to be certified by auditors or third parties. (It would be great if development banks all used third party certification for this, simply to set a precedent for the market.)
Unfortunately, it’s not yet certain that markets will head that way as the record-breaking month saw two new issuers issue bonds without third party certification or clear reference to published standards. Of course investors don’t seem to be too concerned at this stage as even uncertified bonds were oversubscribed. It does make one wander - do we have to have a big scandal for investors to be asking the right questions and demanding standards?
As the market continues to grow, this is something we’ll be banging on about– soon you’ll be saying ‘standards, standards, standards’ in your sleep!
Following is a bit more detail on each of November’s 7 Green Bonds.
