While the green bonds market is still just a ripple in the overall $100 trillion global bond market, this fixed-income asset class, less than ten years old, is attracting waves of new business.
In this Q&A, green bonds specialist Christopher Wigley, a portfolio manager at the responsible investing firm Mirova, discusses why more and more corporations and governments are going green, areas of expansion, and what exactly makes a green bond green.
First off, what’s the difference between a bond and green bond?
A green bond is structured like a conventional bond. It trades on a spread over government securities, and the liquidity is the same. But what is special about a green bond is that it finances environmental projects – such as energy efficiency, renewable energies, and water management. There’s also additional features of reporting the impacts of those projects, usually on an annual basis. So overall, green bonds have a dual impact, both financial and environmental.
How has this new market evolved?
The first green bond was issued in 2007 by the European Investment Bank. And really for the first few years, issuers were large multinational development banks, like the European Investment Bank or the World Bank. But then we really witnessed exponential growth from 2012 onwards, following the global financial crisis. What happened there was that issuers wanted to diversify their investor base. So we’ve seen significant development each year since then. Every year, annual issuance of green bonds has increased – surpassing the previous year’s figure. 2016 was a strong year, with more than $49 billion in new issuance (for $200m and above issues). The total market size for green bonds is now approximately $112 billion (for $200m and above issues).2
There’s also an interesting development under way as we’re seeing more and more corporations issue green bonds, as opposed to multinational development banks. So in terms of the overall universe, we’ve seen growth across the board, but primarily the largest growth in issuance is coming from corporates. In fact, corporate green bonds now represent the single largest issuer type, at about 28% of the market.2
Particularly in the utilities sector, we’re seeing companies transition to become more sustainable. They are looking for solutions to reduce their dependence on fossil fuels and relying more on renewable energy. For example, in Europe there have been new issuances from utility companies in Spain, Austria, Italy, and Holland. This trend is seen across the United States, as well. In fact, Southern Power, a utility, launched a $0.9bn issue in November 2016, its seventh such bond as it shifts to become a major provider of renewable energy.
What drove 2016’s growth surge?
I think a big reason for the surge in issuance in 2016 was momentum from the Paris Climate Agreement. Well over 100 countries, including the three biggest producers of greenhouse gas emissions, China, the U.S., and India, signed on to keep global warming within 2 degrees Celsius. So now there is an aggressive political commitment by governments.
The European Union has pledged to reduce its CO2 emissions by at least 40% by 2030, while the U.S. is targeting a 26%–28% reduction by 2025. Of course, for the moment, these are just announcements. However, the ambitions behind them are now acknowledged as necessary and fully accepted by individuals, governments, and companies.
Where might the most expansion come from, going forward?
As I mentioned, at this moment in time we are at an important point where companies are transitioning to become more sustainable.
Apple, which is the world’s largest company by market capitalization, made news when it issued a $1.5 billion green bond in 2016. It’s the largest green bond to be issued by a U.S. corporation. They are using the money for five sustainable purposes. For example, they financed renewable energy, energy efficiency, and water sustainability at their plants. Plus, they used some money to research sustainable materials, as well as the recycling of phones.
I think this focus on energy transition is rational in a fast-moving corporate world where failure to adapt to new paradigms can lead to surprisingly rapid corporate decline. Whereas green bonds have tended to be used for energy efficiency and transport projects up until now, increasingly they are targeted at climate change adaptation activities.
How does the U.S. compare to the rest of the world in its adoption of green bonds?
Well, I think the most important thing to look at is that the U.S. dollar is one of the largest components of the green bond market. It’s about 40%.2 So the U.S. is a very important part of this global market – and it has the greatest potential I believe today. I think there’s a tremendous amount of potential for U.S. corporates to issue green bonds like Apple has done. Emerging markets are getting the green bug, too. Chinese banks have issued bonds in both RMB and U.S. dollars. Meanwhile, issuance from India is starting to drip-feed into the market. In Mexico, the stock exchange held a green bonds conference in March 2016 which drew an unexpectedly large number of investors and corporates. In Brazil, the national banking body has drawn up guidelines for corporate issuance of green bonds.
Are maturities the same as traditional bonds?
In the early days of green bonds, maturities tended to be relatively short. But as investors have gained confidence in them, maturities are extending. In fact, the European Investment Bank recently issued the longest maturity green bond to date at 21 years. This was slightly longer than an issue by the Dutch utility TenneT, which launched a 20-year bond in mid-2016.
How do investors know the bond is truly “green”?
The Green Bond Principles (GBP) is an industry grouping that provides guidelines and a checklist on issuing green bonds. This checklist lays out the key stages for a green bond issuer, as well as for investors seeking information to assess the environmental impact of their investments. There are about 120 members of GBP, including banks, issuers, and investors. They try to strengthen standards every year, without being too restrictive, because we want the market to grow.
Currently, there are four pillars a green bond needs to fulfill: The use of proceeds, the process of project evaluation and selection, the management of proceeds, and reporting. Overall, lack of transparency by the issuer can lead to the issue’s exclusion from the investment universe.
Christopher Wigley is a Portfolio Manager at Mirova.
Specializing in ESG Fixed Income and Green Bonds for ten years, Chris joined the responsible investing firm Mirova in 2014. Prior to that, he was a Senior Fund Manager at Epworth Investment Management, an ethical investment specialist. With almost 30 years of investment experience, he was an investment manager at Aioi Insurance Company of Europe and managed Mitsui Bank in London’s portfolio primarily in US mortgage-backed securities, corporate bonds and high-yield bonds. Chris is a graduate of the University of Essex in England. He is also a Chartered Wealth Manager.
1 Mirova, a subsidiary of Natixis Asset Management S.A., operates in the U.S. through Natixis Asset Management U.S., LLC.
2 Source: Mirova and Natixis Asset Management, December 2016
Bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors of the issuer.
Green Bonds are debt instruments whose proceeds are used exclusively to fund qualifying green investments in projects such as energy efficiency, transport, water, waste management, land use or adaptation infrastructure. They are similar to traditional bonds in terms of deal structure, but they have different requirements for reporting, auditing and proceed allocations. Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price.
Renewable energy is energy that is collected from renewable resources, which are naturally replenished on a human timescale, such as sunlight, wind, rain, tides, waves, and geothermal heat.
RMB refers to the renminbi, the official currency of the People’s Republic of China.
Spread refers to the difference between the bid and the ask price of a security or asset.
Investing involves risk, including the risk of loss. Investment risk exists with equity, fixed-income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
This material is provided for informational purposes only and should not be construed as investment advice or as a recommendation to buy or sell, or as an offer of, any security referred to herein. The author(s) may have financial interest in one or more of the securities discussed.
The views expressed are those of the author(s) posting those views. They do not necessarily reflect the views of Natixis Global Asset Management ("NGAM") or any of its affiliated entities. The views and opinions expressed may change based on market and other conditions and are subject to change at any time, and there can be no assurance that developments will transpire as forecasted. The opinions and information referenced are dated as indicated and cannot be relied upon as current thereafter.
Natixis Global Asset Management does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decisions.