Green bond comment March: A spring in its step

By Peter Cripps

The green bond market continues to enjoy robust growth during an action-packed first quarter, says Peter Cripps

Figures compiled by Environmental Finance show that $16.3 billion of issues have settled since the start of the year.

This compares with $9.4 billion in the first quarter of 2015 and exceeds the previous biggest quarter – the $15.6 billion recorded in the final three months of last year.

The value of issues in the past three months was pumped up by Chinese banks weighing in with some heavyweight transactions, while US municipals continue to tap the market. Having Apple join the party in February gave the market a confidence boost.

Overall, sentiment is positive. I am particularly excited by the way that national regulators are embracing the market, as countries begin viewing it as a way to help them meet their emissions targets. China and India have come up with their own green bond standards, and Mexico has joined the growing list of stock exchanges offering a dedicated green bond segment to encourage activity.

We are now hearing whispers that the market may be set to receive a further boost, one that could prove a game changer. China is understood to be mulling interest rate subsidies to help incentivise green bond issuers, and I wonder how many other governments are also considering such measures.

As Ulrik Ross comments in our recent feature on green bond pricing, going out and selling the concept of a green bond can be tough work. Most investors do not want to pay up for a green bond, and issuers have hoops to jump through in order to meet investor demands. As a result of this dynamic, it is generally felt that there is no shortage of buyers for green bonds, rather, the constraints on the market come from the number of issuers who are willing to take the plunge.

As Ross argues, a government incentive would be one key way of helping to entice more issuers into the market. The impacts of such a move could be radical.

Coupled with investors' need to make good on environmental, social and governance commitments, made through initiatives such as the Principles for Responsible Investment, this could add up to a very bullish picture for the market.

However, as the asset class has evolved, a growing array of infrastructure has sprung up. In addition to the Green Bond Principles, which have been the glue holding the market together in recent years, there are now the Climate Bonds Standards, a plethora of second-party review providers, four stock exchanges launching dedicated lists, Bloomberg's criteria for listing bonds as green and a range of green bond indexes.

More recently, Moody's has announced its intervention into the market – it is due to launch its assessment methodology shortly. This is on top of the national standards in India and China.

A growing number of green bonds have been certified to the Climate Bonds Standards. But the market has yet to converge around a single means of assessing the green credentials of a bond, leaving some investors feeling confused about the way forward.

And controversy continues to surround some deals, with the SEK1 billion ($115 million) Swedish forestry bond from Sveaskog criticised in some quarters because it is a pure-play issuer rather than having a link to assets. This was despite it having a second opinion from DNV GL.

Georgia Power's $325 million issue was also controversial because some of the proceeds were used for operating expenditure – in this case power purchase agreements – rather than for projects or assets.

So, there will be much to discuss at our sixth annual Green Bonds Europe conference in London on 20 June. This conference has played an important role in the evolution of the market – indeed, the Green Bond Principles were born at an earlier event in the series.

We invite you to come and join the debate this year. This is perhaps the most interesting period yet in the market's development.