The summer holiday is over for the green bond market.
After a modest volume of deals in August, September has begun with a flurry of significant issues, hints of major new commitments, valuable market analysis and encouraging policy developments.
Notable new issues include inaugural bonds from UK energy utility SSE and French property investor Icade alongside repeat issues from Canada's export credit agency and Germany's NRW Bank.
But perhaps the most encouraging news was that State Bank of India, the country's largest commercial bank, is planning to tap the market for up to $3 billion. This would be welcome confirmation of predictions that India's ambitious renewable energy plans would be funded, in part, by a significant number of green bonds.
Such an issue would be likely to win strong support from investors, in light of the healthy demand for Yes Bank's bonds. In particular, the IFC's $2 billion Green Cornerstone Bond Fund would no doubt be keen on such an issue, given its enthusiasm for bonds from emerging market banks.
Sizeable issues from India would help balance the market for emerging market green bonds, which is currently dominated by China. This year has seen slower activity by Chinese issuers compared with 2016, in which they issued more than $30 billion of new green paper. But the country remains a major issuer and ways to strengthen and deepen its market were on the agenda at this week's China-UK Green Finance Forum in Beijing.
Speaking at the Forum, tireless market champion Sean Kidney, CEO of the Climate Bonds Initiative (CBI), called for a Green Bond Connect scheme, to facilitate access to Chinese green bonds by international investors. He suggested that such a scheme could be built on the foundations created by the Bond Connect initiative, launched in July, that allows foreign firms to trade in China's government, agency and corporate debt markets without having to set up onshore accounts.
| Green bonds issued in August (ex-China) | ||||||
|---|---|---|---|---|---|---|
| Issuer | Value (M) | Currency | Dollar value (M) | Settlement date | Maturity date | Second opinion provider |
| Nordic Investment Bank | 2000 | SEK | 250.969 | 29/08/2017 | 29/08/2022 | CICERO |
| City of Greensboro | 25.99 | USD | 25.99 | 17/08/2017 | 01/12/2019 - 01/12/2030 | |
| Anglian Water | 250 | GBP | 328.405 | 10/08/2017 | 10/08/2025 | DNV GL |
| Asian Development Bank | 1250 | USD | 1250 | 10/08/2017 | 10/08/2022 - 10/08/2027 | CICERO |
| KfW | 200 | AUD | 159.269 | 08/08/2017 | 02/07/2020 | CICERO |
| European Investment Bank | 200 | AUD | 159.269 | 03/08/2017 | 03/02/2028 | |
| TOTAL | 2173.902 | |||||
| NB - Table only includes issues that settled in August | ||||||
| Source: Environmental Finance Green Bond Database | ||||||
| If you know of other issues missing from this table. please contact: damaso.zagaglia@environmental-finance.com | ||||||
In an interim report, published jointly with the London branch of the Bank of China, the CBI also called for the use of internationally accepted green bond standards and improvements in China's domestic credit ratings practice.
It also pointed to a need for more education: about green bonds for potential Chinese issuers; and about the Chinese market for international investors.
Such measures could help prevent controversies such as that surrounding the RMB1 billion ($150 million) bond issued in early August to boost the efficiency of a 2GW coal-fired power plant in China. This deal was labelled 'green' by the issuer – Tianjin SDIC Jinneng Electric Power – but not by the CBI. The NGO argues that investing in clean coal now means coal use will be locked in for many years and is incompatible with the Paris Agreement goal to restrict global warming to 2oC.
Such inconsistencies are not unique to China, or even the fossil-fuel industries. Many green bonds from US municipalities allocate their proceeds exclusively to water treatment projects. Yet numerous other municipal bonds, used for the same purposes, eschew the green label.
Similarly, while Mexico City Airport's $2 billion 2016 bond was labelled green, a forthcoming issue to fund expansion of Orlando airport in the US will not carry the 'green' tag, even though it scores more highly under S&P Global's Green Evaluation framework.
The proposed $1 billion bond from the Greater Orlando Aviation Authority scored 78/100 against 77/100 for the Mexican issue.
Such inconsistencies surely confuse, if not deter, some potential issuers and investors from committing to the green bond market. This is unfortunate as it is becoming increasingly clear the green label brings benefits – not just by expanding an issuer's investor base, but also in terms of pricing.
New research from HSBC says: "transaction costs associated with trading green bonds are slightly higher than for non-green bonds," but they "perform well in the secondary market and are issued in line with non-green bonds." They also "appear less volatile than non-green bond in times of stress".
It concludes: "There is value in green bonds for bond investors."
Graham Cooper