The green bond market has made a strong start to 2017, with some $10.5 billion of issues having settled in January (see table below).
This compares with $7.8 billion in January the previous year, according to figures from Environmental Finance's green bond database.
This suggests that the strong growth the market has enjoyed in recent years is set to continue.
2016 saw a record breaking $92.9 billion of issues, up from $42 billion the previous year. A poll conducted by Environmental Finance found that respondents expected the value of issuance to top the $100 billion mark for the first time this year, with more than 40% of respondents predicting issuance of between $120 billion and $160 billion
The big story in January was the Republic of France's mammoth green bond, weighing in at €7 billion, by far the biggest ever issue.
You may remember that Poland pipped France to the post to become the first ever sovereign green bond issuer in December, with a €750 million issue.
In short, the issuance of sovereign green bonds bodes well for the market's future, and represents a major step along the road towards becoming a 'mainstream' market.
But the French made up for this with the sheer size of their issue. The order book was a staggering €23 billion.
The big question for the green bond market is: can sovereign green bonds now become a major source of growth for the market?
I believe that sovereign green bonds are a significant development for a number of reasons.
As demonstrated by France, many countries have considerable green spending, so if they decide to issue en masse, this has the potential to propel the market to a new level.
Another key point is that having countries such as France and Poland issue green bonds is a major fillip for the market because it adds to its credibility. It shows that countries are taking the market seriously, which should help boost investor interest.
Finally, if countries are now issuing green bonds, that suggests that they may also be willing to look at supporting the market in other ways, such as incentivising issuance.
In short, the issuance of sovereign green bonds bodes well for the market's future, and represents a major step along the road towards becoming a 'mainstream' market.
However, it is not currently clear how many countries will follow in France's footsteps.
Environmental Finance is aware of a couple of other countries talking about tapping the market – Nigeria and Sweden – while there are rumours about others, such as China, Germany, India, Italy and the Netherlands.
There are challenges for countries that want to issue, but they all seem surmountable.
Poland changed its laws to enable it to tap the market. It passed legislation to allow the State Treasury to manage segregated funds, in a 'green cash account'.
This is potentially a barrier to issuance, although interestingly, the French sovereign green bond does not have a segregated account.
One banker told me that he does not believe setting up such an account is necessary, although the requirements will differ depending on the laws of the land.
Another potential problem for sovereign issuers is that there is a risk that there is a change of direction from the government, perhaps because of a change of leadership or an election result, and the government may end up deciding to cancel some of its planned green spend. This could lead to a 'green default', where the proceeds are not spent on green projects as promised.
In theory, this risk exists for any green bond issuance, but arguably it is greater for a sovereign where the government and its policies can be changed with an election result. The best way around this problem seems to be use the proceeds for refinancing or projects that have already been signed off, lessening the chance of a green default.
Hopefully, in the case of France, there is no chance of a green default. The spending in question has already been agreed. And the country has made a strong play to become a leader in green finance, building on its role in helping deliver the monumental Paris climate change agreement. We last year placed Paris on a shortlist of countries set to become green financial hubs of the world.
CDC to issue a green bond?
As an example of France's leadership in this space, I visited Paris this week for the launch of the Principles for Positive Impact Finance, which have seen a great deal of backing from French financial institutions.
At a conference to mark the launch, Novethic CEO Anne-Catherine Husson-Traoré revealed that Caisse des Dépôts et Consignations (CDC) is planning its inaugural green bond. CDC is a unique institution but is backed by French public funds and has a development mandate. Some people liken it to a French version of KfW.
No further details of the issue were revealed and CDC has not responded to enquiries. But, rest assured, Environmental Finance will bring you the details as soon as possible.
Warren Buffett goes green
Another significant development this month came from Warren Buffett's MidAmerican Energy.
It has issued a $850 million green bond to refinance spending on giant wind projects in Iowa. The bond is set to settle in February, so the bond is not included in the $10.5 billion of issuance for January.
What I found interesting about this bond is that MidAmerican chose to label it green. This is in contrast to its Solar Star bonds, which had no green label.
Why the change of heart? Investor diversification seems the most probable answer – a green label may allow the bond to be snapped up by green bond funds and other green specialist investors.
But, as one banker put it: "Green bonds are becoming a big deal in the US too and maybe MidAmerican wanted to be part of it."
À bientôt.
Peter Cripps is editor of Environmental Finance
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