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Green Bond Round-up, August 1: First EMEA water bond prices as Fitch warns about managed funds

The latest market developments

Green bond issuance smashed a new record last quarter, according to Moody’s. In its latest report on the subject, the ratings giant said $32.2bn of green bonds were issued in Q2 – a new quarterly high. That brings the total for the year to $61.7bn so far – a 66% increase on the same period last year. But there is another side to the figures: the rate of growth has actually slowed, from 170% in the four quarters between July 2015 and June 2016 to just 24% in the same period for 2016-2017. China has revived its issuance in the second quarter, but the country’s issuance still hasn’t returned to the levels of 2016.

Fitch Ratings has waded into the green bond market, saying the launch of green bond ETFs “could hamper the prospects for managed funds”. Unlike its peers, Moody’s and S&P – which have both developed assessments for green bonds – Fitch hasn’t been active in the market, but has now published a report on green bond funds. It concludes that portfolio managers struggle to achieve enough diversification due to the limited number of deals coming to market, and concentration of green bonds within certain sectors. “This will make it harder for active managers to differentiate their funds from each other and increases the threat from passive index trackers,” the report says. It adds that the current range of green bond indices have a lower exposure to ‘BBB’-rated bonds compared with available funds. “The launch of a green bond fund ETF by Lyxor earlier this year could hamper the prospects for managed funds,” the report says. “The trend of passive funds cannibalizing active funds has been clearly established in the broader market; in the green bond sector limited diversification makes it harder for managed funds to differentiate from the index, and the small size of the sector creates the risk of active funds being crowded out,” it warns. On this basis, Fitch predicts that next year could be “pivotal” for the green bond fund sector, with several existing funds achieving the three-year tracked record required by many investors.

Europe

Anglian Water has become the first EMEA water utility to come to market with a green bond yesterday, giving investors a rare chance to buy sterling notes in the asset class.
The firm, which runs the water infrastructure in the UK’s East Anglia region, issued an eight-year £250m no-grow deal, which attracted £800m of orders from 80 investors following a roadshow in London, Edinburgh and by telephone. The coupon is 1.625%.The sterling green bond market has seen little activity so far, with only a handful of benchmark deals including notes from Unilever, EIB, KfW and Transport for London.

Anglian Water is owned by a consortium of investors known as Osprey, comprising Australia’s IFM Investors (19.8%) and Colonial First State – the asset management arm of Commonwealth Bank of Australia (32.3%); the Canadian Pension Plan Investment Board (32.9%) and London-listed private equity and infrastructure fund, 3i (15%).
Proceeds from the bond will be used to finance sustainable water projects, including water recycling, carbon reduction efforts, the promotion of water efficiency and long-term water planning. According to Anglian Water, projects are not approved unless they save both carbon and money against a baseline, and therefore all its capital expenditure can be included in the eligible pool of assets. However, it has selected key projects and programmes, including drought and flood resilience schemes, to be financed initially. The green bond framework has a second-party opinion from DNV GL and impact reporting will be done using carbon metrics until Anglian Water has developed adequate water metrics to use in additional reporting. Group Treasurer Jane Pilcher said “increasingly environmental and social risk management is influencing debt markets,” adding that Anglian Water hadn’t changed anything in the way it operates in order to issue the bond.

German development bank KfW has produced its latest green bond report, saying in the first half of 2017 it issued the equivalent of €2.3bn in green bonds, and spent €2.2bn on renewable energy. This means 96% of its green fundraising for the year has been allocated already into renewables. For the full report see here.

Asia

India’s Azure Power Energy is readying itself to issue a $500m, five-year green bond, certified by the Climate Bonds Initiative. Proceeds will be used to refinance the solar company’s existing debt and to finance “other general corporate expenses”.

Australasia

New Zealand has seen its first green bond. The IFC has issued a green kauri bond – a bond issued in New Zealand dollars by an offshore issuer. The NZ$100m ($75m), 10-year deal will finance climate change projects in emerging markets, as with all the IFC’s green bonds. IFC has issued some $6bn of green bonds since 2008, through retail and institutional offerings.