Seeds of change

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A spurt of growth in the so-called green bond market is raising questions about where the tendrils of what was once a mere seedling are now heading as new issuers sprout up in an increasingly verdant landscape.

The most fertile soil seems to be corporates, as large groups now put down roots in a market hitherto dominated by supras seeking to cultivate environmental and social change.

Yet an absence of standardisation may still be suppressing growth just as the temperature of debate rises following the latest warnings in March by the Intergovernmental Panel on Climate Change.

This year could mark something of a watershed for green bonds, with HSBC predicting in January that issuance in 2014 could more than double to US$25bn.

SSAs continue to dominate this space, with the IFC issuing a second benchmark green bond in November (a US$1bn three-year), the ADB going green in October (a US$500m three-year) and launching in Swedish kronor this February (a SKr1bn five-year), the World Bank issuing its first euro-denominated green bond (a €550m three-year) in March, and in the same month the EIB launching its first green bond in sterling (a £500m six-year). A pioneer among the multilaterals has been the EBRD, whose first publicly listed green bond (a US$250m five-year) in September took its green tally to 14 issues.

The multilaterals are being followed by development banks and agencies, with issues since November by FMO (a €500m five-year), Kommunalbanken (a US$500m three-year), and NRW.Bank (a €250m four-year).

Frank Richter, head of investor relations at NRW.Bank, said mutual funds remained core to the market but the issue also attracted some new faces and offered valuable lessons.

“The feedback we gathered in the meetings and during the roadshow was that if it comes to issue size, there is a preference for larger issues,” he said. ”In November last year, we decided internally to stick to €250m – and from today’s point of view that is maybe a little bit too small, so going forward we are looking to issue a €500m transaction in 2014, possibly in the late third quarter – September or October.”

What is new, however, is how big corporates have suddenly embraced this format, led in November by Electricité de France, which became the first corporate to issue a benchmark (a €1.4bn 7.5-year), and Bank of America Merrill Lynch (a US$500m three-year). In February, Unibail-Rodamco made its green debut (a €750m 10-year); and in March Toyota unveiled its first green bond in the US auto ABS market (a US$1.75bn one-year) and Unilever went green (with a £250m four-year).

Growing awareness

This pace of growth made the HSBC forecast realistic, said bankers, who pointed to many transactions in the pipeline. But what exactly is driving the momentum?

Susan Barron, MD, frequent borrower origination at Barclays, said that although there was no single cause for the growth, environmental awareness was clearly a contributing factor.

“Understandably, everyone is interested in the genesis of this new market,” she said. “Issuers are eager to contribute to its growth, not only as part of their developmental mandates but also as a result of a greater market and individual focus on environmental and SRI [socially responsible investing] issues. The market also provides diversification opportunities for investors, from which we would expect to see the advent of more and more SRI-specific funds. It becomes a self-fulfilling prophecy.”

Stephanie Sfakianos, head of sustainable capital markets at BNP Paribas, said that so-called environmental, social and governance criteria were now considered to be inescapable components of mitigating business risk.

“The big investors will tell you with a lot of justification that if you aren’t factoring these things into your analysis, then basically you are running too much risk, because governance is important and your attitude to the environment is important,” she said.

”You do need to be very vigilant that the investments you are making are compliant with international norms – not just from an adverse publicity point of view but also from a straightforward risk point of view. What I think is new is how this is now being conveyed into a fixed-income arena. Clearly there are investors saying, ‘We really care about this’.”

Backed by solid agency guarantees, green bonds can also be attractive in terms of risk, but the principal reason for growth continues to be the guiding hand of the big multilaterals.

Alongside corporate issuance, there are other signs that the market is maturing, such as innovation – with Toyota’s ABS foray a case in point.

Banks are also starting to appoint senior figures to roles dedicated solely to sustainability, and a debate about the potential for standardisation has grown in volume since January, when non-profit corporate advisory organisation Ceres published its Green Bond Principles.

Standardisation needed?

The green bonds market remains niche and characterised by bespoke products, highlighting a lack of standardisation and definitional issues.

“Standardisation is very much a double-edged sword,” said Sfakianos. ”We were very happy to sign the Green Bond Principles because it is a very important initiative. The challenge, however, is if you think about the number of investors who are active in sustainable investment and you think about the way their activities have grown up over the years, there is no single definition of a socially responsible investment, any more than there is a definition of a sustainable bond.”

Efforts to address blurred definitions have been driven by public policy organisations not themselves active in the market, which may help to explain why corporates have held back.

Olga Dyakova, senior manager, funding, at the EBRD, said: “For supranationals, it was natural to come to market with green bonds because of our specific mandate: to support socially and environmentally sustainable development, and also because of our transparent public disclosure policy. Whereas, for corporates, it was likely to be a longer process working out how exactly they could clearly explain the underlying investment principles to investors.”

While supras have little difficulty selling green paper, corporates are in a broader business in which green investment is not the sole objective. Yet while the investor base is widening for green bonds, even supras must ensure “deep green” issues do not detract from other projects.

Isabelle Laurent, head of funding at the EBRD, said: “Standardisation rather presumes there is a standard investor, which there isn’t. Different people finance different types of projects and investors are not homogeneous in terms of what they look at, so therefore what’s important is the type of information you put out – and not necessarily what you do – that allows people to then judge what you are doing and whether or not that fits into their criteria. That’s more important than saying green bonds can only be about this type of investment or that type of investment.”

Efforts to get to grips with investor diversity are reflected in changes silently going on at the heart of banking culture, as banks increasingly bring green issues out of their silo and weave them into broader “citizenship” activities – a trend that mirrors what is occurring in climate change governance globally.

Nonetheless, Susan Barron of Barclays believes that the green bonds market still needs to grow if it is to meet the demands of more thematic investment portfolios. She said that the Green Bond Principles provided voluntary process guidelines and encouraged transparency, but individual issuers have thus far tailored their issuance to some extent to reflect their needs and capacity.

“I believe that an element of flexibility will contribute to the growth and liquidity of the market, which is obviously a key requirement for the broader investor community,” she said. ”However, as the market grows, an agreed common market standard could aid the market’s sustainability.”

Time for an index?

Frank Richter of NRW.Bank believes the next step in the cultivation of this market could be the creation of an index, saying: “So far, there is no green bond index available, which makes it very hard for fund managers to build a portfolio – they are used to working against a benchmark. What would be key to expanding this market would be if one of the big index providers like Barclays or iBoxx were able to offer a green bond index. That will trigger additional demand, additional supply. It is the next logical step.”

Yet the limited size of this market will continue to mean that going green reflects a conscious environmental choice, with recent events reminding market players precisely what is at stake.

Sfakianos said: “I definitely think that fear of the climate change process is escalating and the fact that the weather patterns have just been so extraordinary in the last six months hasn’t hurt the position of the people who are most passionately arguing in favour of doing whatever it takes to reduce global warming.”