Will investors ever pay up for a green bond?
Environmental Finance's Green Bonds Americas conference last month was a success. Interest in green bonds in the region is exploding. There is no shortage of asset managers and other institutions in New York who are keen to learn about this fledgling asset class.
The enthusiasm in the US for green bonds – and for environmental, social and governance (ESG) more generally – is palpable. Yet it was only a few years ago that the US was described as a laggard when it comes to ESG.
My sense is that attitudes in the US have changed, and the country is now catching up fast when it comes to ESG.
Our green bonds conference is a good example of this trend. While we have been holding green bond conferences in London for six years, it was only last year that we saw sufficient interest to allow us to hold a major US event. Last year's event attracted some 160 delegates. This year we were up to about 250.
While interest in the asset class is growing, one of my main takeaways from the conference is that more needs to be done to encourage companies that have green capital expenditure to label some of their bonds green.
While the market is growing fast ($45 billion of new issues in 2015 compared with $70 billion so far this year), it is clear that the limiting factor for its growth is not demand. As we have reported countless times, it seems that every green bond is oversubscribed, and sometimes upsized as a result.
The main restraint on growth is a shortage of issues. Multilateral development banks were the main drivers of issuance in the early days of the market. Municipals are also joining the party in increasing numbers. Figures from Environmental Finance's Green Bond Database show they were the most numerous issuer type in October.
Commercial banks have also been a major source of growth in recent months, with several underwriters practising what they preach by issuing green.
But non-bank corporates ultimately hold the key as to whether the market reaches its potential and begins to raise trillions rather than billions of dollars.
Apple's $1.5 billion green bond earlier this year was helpful, as was Starbucks' $500 million 'sustainability bond'.
The key question that the market should be asking itself is: what is holding issuance back?
Part of the reason might be to do with pricing – that issuers are expected to pay extra costs to issue green but investors, generally, don't want to 'pay up' for a green bond. This was a discussion that was well aired at the conference.
Peter Cripps