The European Commission has drawn up a list of options for public bodies wanting to foster the green bond market – including public investment in the asset class, public issuance, support for aggregation and standardisation, credit enhancement, tax incentives and “preferential treatment of green bonds in monetary regulation and central bank strategy”.
In a report titled Study on the potential of green bond finance for resource-efficient investments, the Commission identifies a series of ‘bottlenecks’ hindering growth in the market. The main one, it says, is a lack of awareness of green bonds on the part of potential issuers, tying in with the absence of a universal green bond standard and expectations around impact reporting. “No monitoring mechanism is in place to ensure compliance,” the authors point out, adding that “in the future, it may be relevant for investors to seek penalties if the bonds do not achieve the expected green impacts”.
“Such penalty mechanisms do not exist to date and different types of mechanism could be tested,” it suggests, reinforcing statements made by Mark Carney, Governor of the Bank of England, who recently said authorities were working with the private sector to develop “an appropriate dispute mechanism for when [green bond] conditions are not met”.
The report goes a step further than Carney, though, by identifying some possible options for dealing with non-compliant green bonds, such as “bond buy-back obligations in case of green default, loss of green ratings for this (and other) bonds issued by the entity [and] loss of potential tax benefits”. However, the report highlights, this would meet resistance from some issuers who may be put off tapping the market if faced with the risk of penalties.
Around impact, the authors say “several” interviewees raised concerns about the lack of requirements around reporting. “Thus, it cannot be guaranteed that green bonds actually deliver the expected environmental and climate-related benefits,” the report states, suggesting “making annual reports for investors and issuers mandatory” as one way to “significantly increase the information available”.
Other concerns flagged by the document include “a race to the bottom” for second-party opinion providers, wishing to provide the “most favourable” assessments in an increasingly crowded market. This leads to some assessments being of unsatisfactory quality, it said – not covering human rights impacts, for example. There is also potential conflict of interest, the research highlights: “Some of the second opinion providers sell their services for assessing green bonds and then rate the same companies… some market actors feel that only a clear green bond standard, which is developed and financed by public actors, could alleviate this problem.”
The report touches on tax incentives as a means to compensate for what some perceive to be an increased risk profile for bonds associated with less established green technologies, although the authors warn that mechanisms such as this introduce policy risk into the market. Other initiatives that public bodies could take up in order to overcome some of the issues include standardising contracts for renewable energy or energy efficiency, for example, in order to enable assets to be pooled as simply as possible, and introducing policy changes to allow green assets to more easily serve as collateral for covered bonds (in some countries this is currently difficult).h6. Latin America
Brazil’s National Bank for Economic and Social Development (BNDES) has launched a R$500 million (€135m) Sustainable Energy Fund to buy domestically issued renewable energy bonds. The fund was approved last week and will come into operation in mid-2017, according to a statement from BNDES. “Its objective is to invest actively in the primary and secondary markets in infrastructure debentures, especially in low-carbon projects,” it says. “BNDES hopes, with this initiative, to spur the market for green bonds in Brazil, enlarge the investor base for infrastructure projects and increase liquidity in infrastructure bond markets,” it continues, estimating that the volume of issuance over the next 18 months at some R$3.8bn, of which it predicts R$1.7bn will be in wind energy.
Brazilian pulp and paper company Suzano Papel E Celulose has returned to market – this time with a domestic market deal. According to a note from Suzano, it raised R$1bn (€271m) in the eight-year, securitized transaction, which was backed by an export credit note. The notes will be open for renegotiation after four years. Suzano issued a $500m green bond this summer to finance sustainable forestry projects, renewable energy and energy efficiency.
Indonesia may be the next Asian country to enter the green bond market, according to local reports. The Financial Services Authority, Otoritas Jasa Keuangan (OJK), is understood to be mulling the idea of developing green bond guidance for companies and banks in the country, in order to boost investment into green projects. The statements were apparently made at a Sustainable Banking Network meeting in Bali last week. OJK did not respond to requests for comment at the time of publication.
Moody’s recently assigned its first green bond rating in China, marking not only its entry into the region’s market, but also the largest green bond to date. The deal, issued by China’s Bank of Communications Co, took place last month in the form of a RMB10bn, three-year tranche and a RMB20bn, five-year tranche, giving it an equivalent combined size of some $4.4bn. Moody’s gave it a GB1 rating – the highest on its scale, and the only score it has awarded an issuer so far. It said that despite being the first transaction from BoCom, the firm’s “green credit strategy” has been in place since 2008, so it has a visible history to assess. Projects are aligned with the People’s Bank of China’s national green bond guidelines, Moody’s says, with an “internally identified” pipeline of eligible assets.
The African Development Bank has returned to market with a 5.5-year, SEK-denominated green bond – its first of 2016. It is the issuer’s fifth green bond and its third in SEK, attracting strong interest from Swedish buyers (98%) and securing pricing of 15 basis points above five-year mid swaps (equivalent to a yield of 0.413%).
In “big news for New York State”, its Homes and Community Renewal’s Housing Finance Agency has kick-started a green bond programme focused on energy efficient housing. It has secured Climate Bonds Initiative certification on $100m of affordable housing bonds to finance property “with a positive impact on the environment and climate”. “New York is a model for other states, being the top issuer of housing bonds in the country, and now making them even more marketable to green bond investors,” the state said.