The green bond market is flying high this year, with the value of new issues already greater than seen in the whole of 2015 and demand expected to grow. But concerns remain about the mix of issuers, says Graham Cooper
Some $48.2 billion of labelled green bonds have been issued this year, well ahead of the $43.4 billion issued in the whole of 2015, according to Environmental Finance's data.
This means the market is on track to set a new record for the fifth consecutive year, notes Moody's Investors Service, which has increased its estimate for full-year issuance to $75 billion from $70 billion.
Most issues have been healthily over-subscribed and demand is expected to remain strong, as investors come under mounting pressure to show how they are addressing climate change risks.
New French legislation requires asset owners and asset managers to report on their portfolio's integration of environmental, social and governance (ESG) factors, climate risks, and contribution to the transition to a low-carbon economy, or explain why they have not done so.
"This would seem to provide a potential boost to green bond demand among French asset managers," says Societe Generale analyst Bob Buhr. "One virtue recognised by investors is that acquiring green bonds provides a straightforward means to address climate issues."
The EU is understood to be considering introducing similar legislation across all 28 member states which, if adopted, would magnify the impact of the French law and boost demand for green bonds further, Buhr says.
But, despite such helpful tailwinds and initiatives such as the updated Green Bond Principles, some participants are concerned that the market remains unbalanced.
The increasing number of issues from emerging markets is generally hailed as a positive sign but eligibility criteria for the use of bond proceeds in these markets can differ from those used in the Green Bond Principles.
"The proliferation of standards, frameworks and guidelines, as well as the diversity of market practices in terms of definitions and requirements for green bonds create complexity and confusion among issuers and investors," WWF warned in a recent report. Unless this is addressed, it "could hamper the confidence needed for the green bond market to thrive," the NGO said.
A specific concern for many is that Chinese domestic green bonds could be used to finance 'clean coal' projects, whereas "coal in any form is excluded from international green bond definitions", notes the Climate Bonds Initiative.
Chinese issuers already account for almost $18 billion of 2016's total, of which $6 billion came in just three transactions last week.
Another concern is the relative lack of corporate issues, which bucked the overall trend by declining in the first six months of this year to €10.13 billion ($11.13 billion) from €10.75 billion in the same period of 2015, according to Societe Generale. This sector of the market remains dominated by financial, energy and real estate companies, Buhr notes. "We had been hoping for increased diversity ... and have been disappointed in this regard."
Some observers blame the additional costs of independent reviews and reporting on the green credentials of the projects to be funded. Others point to increased reputational risk after negative press and NGO comment on certain issues. And, as yet, there is no convincing evidence of any pricing benefit, according to Buhr.
Despite this, however, several major corporate issuers are known to be planning more green bonds and other sectors of the market – particularly US municipalities, and Chinese and Indian banks – are poised for substantial issuance in the remaining five months of the year.