Energy Surge Seen in Green Bonds Market

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,1 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 US, 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 US 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 US 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 US 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 US dollar is one of the largest components of the green bond market. It’s about 40%.2 So the US 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 US 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 US 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 Senior Fixed Income Portfolio Manager at Mirova*.

Christopher Wigley began his career in 1987 with the Mitsui Bank in London, managing the bank’s investment portfolio primarily in US treasuries, US mortgage-backed securities, corporate bonds and high yield bonds. In 1996, he joined Aioi Insurance Company of Europe as the Investment Manager responsible primarily for European government bonds, corporate bonds and European branch investments. In 2004, he became the Senior Fund Manager at Epworth Investment Management, a specialist in ethical investment. There Chris was responsible for all the fixed income portfolios including government bonds, inflation-linked securities and corporate bonds. Chris has been a specialist in ESG Fixed Income and Green Bonds for ten years. He joined Mirova in 2014.

Chris is a graduate of the University of Essex in England. He is also a Chartered Wealth Manager and has 28 years of professional fixed income investment experience.