The green bond machine
Banks find the grass is greener with dedicated environmentally friendly bonds.
For an asset class that accounts for less than 1% of the corporate bond market, green bonds have been attracting an awful lot of attention. Indeed, Barclays and MSCI plan to launch a green bond index, expanding on the environmental, social and governance (ESG) fixed income benchmark that they launched in June 2013.
This seems quite a commitment for a market that saw just $14 billion in issuance from development banks, projects and companies worldwide last year. But The Climate Bonds Initiative confidently predicts that total issuance could reach $40 billion by the end of this year and increase to $100 billion in 2015.
If a percentage of that issuance can be sustainably powered by banker talk alone, the figures could well materialize. Green bonds are the subject du jour at investment banks, many of which signed up to a set of voluntary Green Bond Principles in January. Signatories included Bank of America Merrill Lynch, Citi, Crédit Agricole, JP Morgan Chase, BNP Paribas, Daiwa, Deutsche Bank, Goldman Sachs, HSBC, Mizuho, Morgan Stanley, Rabobank and SEB.
Few of these names are complete strangers to the lending syndicates of, for example, project financings for coal-fired power stations. Their new found enthusiasm for all things green is a recognition of the large pools of money that are amassing at investment firms targeted at sustainable opportunities. For example, when vehicle manufacturer Toyota issued a green bond earlier this year to fund the development of energy efficient cars the deal was increased from $1.25 billion to $1.75 billion in the face of overwhelming demand. French energy utility GDF Suez issued a $3.45 billion equivalent green bond – the largest deal so far.
Just how motivated this money is by the green nature of the bonds or whether investors see them as simply a diversity play is unclear (in the US a green bond has been issued to finance the construction of a shopping mall).
But the number of banks talking about finding out is set to grow. BAML has led the charge with the UK’s Lloyds having sold an ESG bond last month. These deals serve the dual purpose of giving the banks themselves some much-needed positive PR and enabling them to tap into a pool of investors that under normal circumstances would probably not touch them with a bargepole.
So for the time being the green bond circus that has rolled into town looks set to stay. Whether or not the big top is entirely ethically underpinned is, however, less obvious.