It was pleasing to see some ground-breaking issues in the green bond market in recent weeks, reflecting its continued growth.
There has been $6.7 billion of issuance in the third quarter of 2015, according to figures compiled by Environmental Finance.
Some of the more noteworthy transactions of recent weeks have seen an insurer co-ordinating a green bond issue, a multilateral development bank (MDB) issuing a green bond to buy a green bond issued by an Indian bank, and the use of credit enhancement.
Let's start with the green bond issued by Goldman Sachs-backed wind developer ReNew Power. Its INR4.5 billion ($68 million) AA+ rated issue benefited from credit enhancement in the form of a partial credit guarantee by state-run financial institution India Infrastructure Finance Company Ltd, and a partial backstop guarantee by the Asian Development Bank.
This was the first credit enhanced green bond to come out of India and one of the first labelled 'use of proceeds' green bonds to benefit from this kind of support.
Credit enhancements, which were named in a recent Climate Bonds Initiative report as a key way for policymakers to help boost the green bond market, provide a means for MDBs to crowd-in the private sector through de-risking investments.
I suspect that credit enhancement will increasingly be used as a tool by MDBs as they look for other ways than simply financing projects to boost their sphere of influence. The IFC's Rachel Kyte suggested as much in a speech earlier this year.
Staying with India, Yes Bank came to market with its second 'green infrastructure bond', this time raising INR3.15 billion ($49 million) to lend to renewables projects or developers in the country.
But whereas its previous bond was a straight-forward 'use of proceeds' bond sold to numerous investors, its second issue had a novel twist. These notes were bought privately by the IFC, with the transaction funded by the proceeds of a separate green bond it issued at the same time.
The IFC's rupee-denominated notes, which have its AAA credit rating, were listed on the London Stock Exchange as 'Masala bonds'. It was the first green bond issued in the offshore rupee market.
The way the deal was structured means that the IFC was lending its balance sheet strength – and AAA rating – to the Yes Bank issue.
The transaction marked the first time the IFC had bought, rather than issued, a green bond. Arun Kumar Sharma, chief investment officer at the IFC's financial institutions group, said the bank will consider more transactions like this and had already received more than a dozen enquiries from potential green bond issuers around the world.
He said the IFC was effectively using Yes Bank as an aggregator of renewables projects, pointing out that the domestic lender had better knowledge of prospective candidates than the IFC.
These two Indian bonds were joined last month by an issue from CLP Wind Farms, which became the first non-bank corporate in India to tap the green bond market.
This trio of Indian issues demonstrates the vast potential of emerging market countries to boost the green bond market. Or, to put it another way, they show the potential of the green bond market to help finance the renewables build-out required in emerging markets.
Moving on to Europe, private equity firm Global Infrastructure Partners is this month set to issue a green bond to help buy 50% of the Gode Wind 1 offshore wind project from Dong Energy.
This was not the first green bond issued to buy a project, but it was unusual in the sense that German insurer Talanx acted as lead manager and the notes were bought by Talanx and other German insurers, driven by the ongoing search for yield.
Another noteworthy aspect of the bond was that it had a 'make whole' provision – a feature not known to have been included in any other issues so far.
The private placement was announced in September and will be issued shortly, following regulatory approval.
One other noteworthy development in recent weeks was a Barclays report that finds that green bonds are trading on the secondary market at slightly tighter option-adjusted spreads when compared with their non-green counterparts.
If green bonds were to be rewarded with a pricing advantage, that would be a game changer for the entire asset class.
The idea that investors would be prepared to 'pay up' for a green bond would certainly encourage more issuers into the market. And if investors were happy to pay up for a green bond, it could encourage issuers to build more 'green' projects, which would end the debate about whether the asset class is currently 'additional' in its climate impact. No wonder the story shot to the top of our 'Most Read' stories panel!
The findings of the report were a surprise because, so far, the shibboleth of the fledgling market has been that green bonds will only fly if they have exactly the same financial attributes as their non-green equivalents.
Any research into the secondary market has been hindered by the fact that there has been little trading of green notes following issuance, because the market is small and tends to attract 'buy-and-hold' investors.
It is important to note that the report only finds significant differences in the spread in the past few months. So, although I welcome the Barclays report, I think its findings need to be treated with caution. It is early days yet for this emerging market. But watch this space – perhaps this will be the shape of things to come. EF
