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As France plans green bond, what can investors expect from the green bond market in 2017?

Increasing sovereign issuance is a key trend to watch this year

Today’s news that France is planning a green bond roadshow means 2017 is starting very much on the front foot in terms of issuance. Last year was another big year for the market, with a number of ‘firsts’ including the first sovereign green bond from Poland, the first municipal green bond out of Latin America and the first covered green bond out of Asia. There have been positive signs for high-level sustainable finance developments, such as the European Commission’s new expert working group, the Financial Stability Board’s Task Force on Climate-Related Disclosure and Mark Carney’s strident statements on the need to foster financial instruments that tackle climate change. But what impact will these innovations, and the political sentiment of some of the world’s biggest players, have on the green bond market in 2017?
“There’ll be more growth,” says Christopher Flensborg, Head of Climate and Sustainable Financial Solutions at SEB, which has pioneered the market and will launch a research series on the asset class this year. “But that growth will be limited – it won’t be at the scale we’ve seen so far.” The reason, Flensborg explains, is because there is “a stop/go mentality” in the market, and participants “need time to digest all the acceleration that has happened so far”.

US

The recent changes in the US may also contribute to a slow-down in activity, Flensborg says. “There is uncertainty there…and despite strong commitment from many players like ourselves, a lot of institutions, especially intermediaries, will not have green bonds on the top of their priority list.”
There has been widespread concern that the election of Donald Trump as President may have a more profound – and longer-term – impact on green bonds, as the world waits to see whether he will pursue the country’s climate commitments, made under the Paris Agreement, or dismiss them in favour of trying to reboot the oil and coal sectors.
“I’m not expecting the situation in the US to alter issuance significantly,” says Yo Takatsuki, an associate director in the Governance and Sustainable Investment division of BMO Global Asset Management, who’s seen the assets invested and committed to the firm’s green bond strategy go from zero in 2015 to €225m by the end of 2016. “Ultimately, these are going to be corporate-level decisions. There may be some companies that change their mind about how they approach climate issues, but lots have already committed significant resources to trying to change their strategies – I don’t believe they will start trying to turn back the clock on that.”Asia

Political sentiment elsewhere in the world is a lot more clear-cut. China dominated the headlines with its green bonds in 2016, with mammoth transactions pushing issuance out of the country to some RMB200bn.
Ma Jun, Chief Economist at the People’s Bank of China, says the market should expect this growth to continue in 2017. “Given the very high level of interest from many potential issuers, including banks and corporates, I believe that China’s green bond issuance will continue to grow rapidly,” he told Responsible Investor, adding that the regulation and infrastructure underpinning the asset class in China was also evolving.

“2017 may well become year of the sovereign green bond”

“There are now eight agencies that provide third-party assurance services for green bonds, three green bond and climate bond indices, and three Chinese ratings agencies that have developed green bond rating methodologies. And these services will continue to develop,” he said.
In addition, he told RI: “We are encouraging local governments to provide incentives for green bond issues, including via providing guarantees to green bonds… and working on refining the green bond catalogue of definitions, enhancing the quality of third-party assurance and developing green bond indices and ratings.”
Some hope that refining China’s green bond catalogue will include addressing its acceptance of ‘clean coal’ as an eligible category for financing. It’s an issue that caused much controversy in 2016, as Chinese issuers looked increasingly to overseas investors to buy their green notes.
“International responsible investors don’t necessarily want ‘clean coal’ to be classified as green, and it will be interesting to see how far the Chinese take that on board when they further refine their guidance, and how far they will move towards international best practice,” says Manuel Adamini, who heads up investor outreach at the Climate Bonds Initiative advocacy group.
There is movement elsewhere in Asia too, according to Adamini who claims there are “questions in the market around India, trying to get its issuance to levels that mirror China’s lead, given the size of its economy”.

Japan is also expected to scale up its market this year, after its Environment Ministry launched a green bond working group to develop national standards for the asset class. The group is expected to launch the standards in March.

LatAm

But it’s Latin America that is getting many people excited in 2017. It’s not been a busy market so far, but 2016 saw a lot of work being done behind the scenes – the fruits of which may come to bear this year.

“Awareness is building in Brazil,” says Gustavo Pimentel, Managing Director at Sitawi Finance for Good, which is beginning to perform second-party opinions for a number of Brazilian green bonds slated for 2017. The bonds are all for renewable energy assets currently, but Pimentel believes we will also begin to see a widening of the projects being financed in Latin America, to include agriculture, forestry, rail and other green infrastructure.
“Brazilian and Mexican blue-chips are the obvious next frontier for green bonds in 2017, when it comes to issuers,” he adds. “And within a year, I’d hope to see commercial banks issuing too.”
But beyond Mexico and Brazil, whose capital markets are more developed than many other Latin American countries, the focus will be on deals from state-backed banks – which Pimentel forecasts will account for five to seven new entrants in the region over the year.

To boost this, the Inter-American Development Bank (IDB) is working with national development banks in Latin America and the Caribbean – with financial backing from the Swiss Government – to help identify which projects in their portfolio might be eligible for support under a green bond.
Banks engaging so far are located in Brazil, Colombia, Mexico and Peru; and possible eligible assets include infrastructure, for banks such as Banobras in Mexico or Findeter in Colombia, industry and SMEs, for banks such as Bancoldex in Colombia, and agribusiness, for banks such as Agrobanco in Peru or FIRA in Mexico.

“In some countries, such as Mexico and Brazil and Colombia, which have ministry-led discussions around green bonds, we expect to see incentives and government signals begin to be built in,” says Maria Netto, lead specialist in capital markets and financial institutions at the IDB. “I think we will see more public banks issue, but also private ones, and I hope that would encourage others to get involved in the international markets.The local capital markets will need a bit longer to be stimulated depending on local economic conditions. That may begin to happen in 2017, and then we may see more movement in 2018 on the domestic level.”

Other developments
It’s not just regions that are expected to diversify this year.

“If the market wants to grow then there needs to be a broadening of sectors,” says Julia Haake, Director of International Business Development at oekom research, a sustainability ratings agency that provides second-party opinions on green bonds.
“There are only so many utilities and banks with enough renewable energy assets to issue a green bond against. The types of assets and issuer must diversify.”
And there are signs that this will happen in coming months.
“2017 may well become year of the sovereign green bond,” says CBI’s Adamini. France has already announced its roadshow – beginning on Friday – following Poland’s issuance last month. Sweden, China and Nigeria are among others understood to be looking at the market. “We’ll also go further down the credit rating chain,” he predicts, referring mainly to corporate issuance.
Oekom’s Haake believes the market will also begin to see smaller deals this year, enabling corporates that don’t have enough green assets for a benchmark offering to still tap the market with private placements or retail deals.
Adamini agrees that this is a trend, saying CBI has had “many serious enquiries” about private placements and Schuldschein (German loan instruments). “There is interest in these smaller bonds, and we hope that will translate into deals.”
And interest from smaller investors is growing, too. BMO’s Takatsuki says current commitments to its green bond strategy are from large pension funds and institutional investors, but there is “increasing interest in the green bond market from foundations, charities, smaller pension funds and wholesale investors”.