Brexit and trade tensions threaten to stifle the green bond market in the short-term, according to SEB’s latest report, with agencies and municipalities pulling back from the asset class. The uncertainly around the UK’s relationship with Europe is one of the factors that may foster risk on currencies, the bank said, although the effects of this apply to the entire bond market, not solely to green issuance.
Last month’s issuance was disappointing, according to the figures, which show it was down by at least 40% against the same period last year. However, the second quarter of 2018 saw the market’s second highest ever issuance, up 21% year-on-year to $47bn – a relief for many, after slow growth in the previous quarter. That brought the total for the first half of 2018 to $83bn – up 18% year-on-year, with at least 85 issuers (including 24 repeats) selling in 16 currencies.
UniCredit has different figures, saying issuance reached $72bn, while Moody’s claims it is somewhere in the middle, at $76.7bn. Either way, growth hasn’t met earlier estimates, so SEB has scaled down its predictions to $185bn for the year, with an upside of $210bn. UniCredit’s prediction stands at $165bn for 2018, with Head of Sustainability Bonds Antonio Keglevich saying that “hardly any institutional manager can do without some form of ESG or SRI fund”, meaning green bonds often end up with higher subscription rates than conventional ones. “This in turn allows issuers to benefit from lower new-issue premiums,” he claimed. Based on SEB’s figures, corporates have been strong players so far in 2018, with $40.3bn in issuance – up 27% year on year, mainly down to deals by financials ($24bn, up 85% year on year), while non-financial corporates have slipped in issuance by 14%. The bank expects agencies to continue to play a smaller part in the market through the rest of the year, while sovereigns and supranationals will continue to contribute more issuance.
Indeed, supranationals have broken new ground this week again. The World Bank will issue the world’s first blockchain bond – also being touted as a sustainability bond – after mandating Commonwealth Bank of Australia to run the deal. The WB argues that all its bond issuance is sustainable, as its mandate is to support sustainable development. Therefore, it does not explain how the use of proceeds will fit into a sustainability bond framework.
However, Chief Information Officer Denis Robitaille did say: “Helping countries transition to technology-led development is key to our goals of reducing poverty and promoting lasting development,” adding that the bond was “a milestone in our efforts to learn how we can advise our client countries on the opportunities and risk that disruptive technologies offer as we strive to achieve the Sustainable Development Goals”. The bond will be issued after a roadshow.
Californian Treasurer John Chiang reiterated his position on climate finance this week, calling President Trump’s scepticism “lunacy” and saying that building climate-aligned infrastructure “is now deadly serious business”. The remarks were made at an event for policymakers and high-level executives at the California Policy Summit, hosted by economic think-tank the Milken Institute. Together, the Milken Institute and the Californian Treasury launched a second report on scaling up the green bond market in the US. As well as proposing more standardisation in the asset class, better definitions of what counts as green, and stronger data reporting, the report suggests that California – the fifth largest economy in the world – creates a Responsible Issuer Programme, through which it would “aggregate information to facilitate and simplify market participation”. “To lower the cost of issuing green bonds, the state can offer credit enhancements or establish a green bond insurance programme,” it added, as well as suggesting the programme created a scale to measure the ‘greenness’ of projects and activities.At the same event, Chiang signed the Green Bond Pledge, which commits California to financing as much infrastructure as possible through green bonds, and the next step will be the creation of a working group to implement a strategy for this.
The announcements follow a nationwide ‘listening tour’ conducted by Chiang in 2016 to establish the barriers to scaling green bonds in the US. Earlier this year he convened a conference dedicated to the asset class. The first report on the topic came from the Milken Institute last year.
Elsewhere, although municipalities may have slowed their issuance lately, there is still activity in the US. The City and County of Honolulu is planning to sell $463m of green bonds in its third deal so far.
The Department of Aviation of the City and County of Denver has also issued green bonds in order to finance new infrastructure for airports. It’s a controversial topic, which first reared its head when Mexico Airport came to market with green bonds in 2016. It has now issued billions of dollars in the asset class, mainly to finance energy efficient buildings. The bonds from Denver will be used to expand the airport’s concourses to LEED standards. S&P Global Ratings gave the bonds an E1 – its top score, saying that, because of the high carbon intensity of Colorado’s grid, a lot of carbon emissions will be avoided by the energy efficiency measures being taken.
The UK’s Debt Management Office has told RI that, despite formal recommendations, the Treasury is not planning to issue sovereign green bonds. Earlier this year, the Green Finance Taskforce – a body convened by government to look at the country’s green economy – advised that the UK should joined the growing list of sovereign green bond issuers, in a bid to finance more projects and to spur on relatively dormant national issuance. A spokesperson told RI that the Treasury was currently considering the recommendations, and the Government would respond in due course. However, he added: “The government has no current plans to issue sovereign green bonds, including in programmatic form. From the debt management perspective, we must have regard to the government’s debt management objective of long-run cost minimisation taking account of risk.”
Another financial player has thrown its hat into the sustainability bond ring, according to reports. Bank Australia, a self-labelled “responsible” bank, is understood to be mulling a sustainability bond. The bank claims its profits are returned to customers through better terms, and investments are used “to create positive social and environmental change”. It has not raised any debt so far, but is apparently about to roadshow in Australia with a view to issuing an AUD-denominated deal with a three-year tenor.
In further signs that Australia is catching on to green bonds, Monash University will return to market with A$116m of notes in its third deal – a 20-year private placement approved by the Climate Bonds Initiative, through EY. Moody’s has awarded the deal at GB1 – its top score. Proceeds will be used to construct an energy efficient building.
The International Finance Corporation is buying $150m of green notes from Indonesian bank OCBC NISP, in a private placement which the MDB hopes will catalyse the country’s green bond market. It is the first labelled deal from the bank, and has a tenor of five years. IFC is also the green finance advisor to the bank, and will help select eligible projects and report on use of proceeds. Last year, it announced the launch of a mammoth emerging markets green bond fund through which it would buy and offer technical support to client banks – particularly in Asia – to scale the asset class outside of Europe and North America, and offer diversification to investors. Indonesia has a national commitment to reduce greenhouse gas emissions by 29% by 2030.
A second Japanese shipping company is coming to market with a green bond, following in the footsteps of Nippon Yusen Kaisha, which debuted earlier this year. Mitsui OSK Lines plans to sell two modest, ¥5bn ($45m) bonds in coming months, to be used for water treatment systems, natural-gas powered vessels and new, energy efficient components, among other things. Vigeo Eiris provided the second-party opinion.
In Pakistan, a wind farm from Jhimpir Power has received support in the form of ‘green guarantees’. The Overseas Private Investment Corporation (OPIC) – which helps develop US overseas trade and business – has sold $7.6m as part of a $94m series, and will loan the proceeds to Jhimpir to finance the project.The Shanghai Stock Exchange is making it easier for green bond issuers to list, by simplifying the relevant documentation in order to reduce uncertainty of issuance timeframes. The new rules were set out it its Guidelines on Optimized Financing Regulation and Continuous Financing Regulation on Corporate Bonds.