A new report from Deutsche Bank Research - ‘Green Bonds – Increasingly Relevant in the Corporate Bond Market’ - has highlighted how few asset classes saw the stratospheric growth in 2019 that the green bond market did. Even though it is around a decade old, the market is still very much in its infancy, with 2019 seeing just over US$250bn of green bonds issued around the world. Because this is tiny relative to the wider corporate bond market, green bonds don’t receive a lot of attention. But that is changing quickly. The growth of the green corporate bond market is impressive, more than three-quarters of the market comes from the US or Europe, with the latter making up nearly 60% alone. China makes up just 5%. Currency-wise, 95% of these bonds are denominated in either USD or EUR. At a sector level, utilities (39%) and banking (33%) dominate.
In Europe, eligible green projects for bonds include renewable energy, energy efficiency, pollution prevention and control, eco-efficient and/or circular economy adapted products, production technologies and processes, green buildings, terrestrial and aquatic biodiversity conservation and clean transportation among others.
Historically, the green bond market was dominated by surpranationals and quasi-sovereigns. However, the emergence of a more rigorous framework around the definition of green bonds, namely the establishment of the Green Bond Principles from the International Capital Markets Association (ICMA), as well as the greater focus on climate change, has seen both corporates and financials start to gain market share. In 2018 and 2019 around half of green bond issuance came from either corporates or financials. The report notes that currently, the size of the index-eligible global green bond universe of financial and corporate issues is US$179bn.
The Climate Bonds Initiative (CBI) - a global NGO focused on climate change solutions - recently forecast that issuance could be as much as US$350-400bn representing issuance growth of 29% to 48%. The report says that, assuming a similar split of corporates and financials versus surpras/quasi bonds, this could mean green corporate bond issuance of around US$175-200bn. A recent market survey focusing on Europe also indicated that demand is outweighing supply with two-thirds of respondents overweight green bonds. Results also showed that almost half of the respondents have a specific green bond fund and a third have specific mandates or targets.
In terms of challenges, the report notes that there is still no universally accepted global framework. As such, standards and regulation remain a concern. The CBI identifies seven different categories of use of proceeds but a further 67 sub-categories. This includes anything from solar energy to bicycle infrastructure, and from waste prevention to forestry. The research suggest that on the positive side, at least in Europe, a classification system aimed at strengthening the market’s legitimacy appears to be underway. Late last year, EU policymakers agreed on common definitions for environmentally friendly investments, primarily intended to avoid ‘greenwashing’.
The agreement means that financial products will be categorised into three levels of ‘greenness’ and according to a news outlet will also require full disclosure for all financial instruments, which will force funds without sustainability claims to disclose that they are not assessed under the green criteria. The deal still needs to be approved by the European Commission but appears to be a step in the right direction for now.
As more universally accepted frameworks for green bonds fall into place, they will only become more relevant to the corporate bond market.
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