Fixed income faces green-investing food fight
Total issuance to hit $40 billion this year; UN initiative pushes for SRI fixed-income market.
This year alone $20 billion of issuance in green bonds is expected – more than the total amount issued since the asset class emerged in 2007 – as investors commit themselves to allocating to environment-friendly and socially responsible asset classes beyond equities.
In May, Regency Centers Corp, a US shopping centre real estate investment trust, issued the first ever dollar-denominated Reit green bond, with $250 million in 10-year notes. French power company GDF Suez issued the largest corporate green bond to date, of $3.4 billion.
Green bonds have been fairly slow to take off. In 2007, the European Investment Bank launched the first green bond, shortly followed by the World Bank.
“Up until last year, deals tended to be niche, small private placements from triple-A development banks,” says Suzanne Buchta, co-head of green debt capital markets at Bank of America Merrill Lynch.
|“By the end of last year
we had seen $20 billion
in total issuance since
2007, and we could
see that issuance
figure doubled by the
end of 2014”
-Suzanne Buchta, BAML
Last year, however, that began to shift, with $500 million and $1 billion deals from Bank of America Merrill Lynch, Korean Export Bank and Electricité de France (EdF).
“By the end of last year we had seen $20 billion in total issuance since 2007, and we seem to have reached a tipping point,” says Buchta. “Now we are seeing non-triple A-rated deals coming in at large sizes in different currencies and structures, and we could see that issuance figure doubled by the end of 2014.” This year Unilever launched the first sterling-denominated green bond. Toyota launched the first asset-backed green bond in March.
By issuing green bonds, borrowers open up their investor bases to new lenders. Green investors from small targeted asset managers, private bank green funds, as well as state pension funds, endowments and insurance money that all have ringfenced assets to dedicate to green investing will be potential buyers.
Buchta says that for Regency the green bond was an opportunity for brand recognition. Regency has been committed to sustainability for several years and issuing a green bond was a means to publicize its efforts on a larger scale.
Busier and busier
She adds that for the investors demand is partly driven by the fact that they still have a lot of cash to put to work. “We keep thinking that each year will be the last year of low yields in the bond market, but each year gets busier.”
Issuance to May 21 this year in the US corporate (non-FIG) investment-grade market has been $271 billion – $40 billion less than the same period last year, but beating the year-to-date issuances of 2012, 2011 and 2010.
Green bonds look no different to other bonds issued by the same borrower.
“From a yield and credit perspective, the bonds are the same, so investors don’t have to do a different credit analysis if they like the borrower,” says Buchta.
The only difference with a green bond is that the issuer will use the proceeds for environmentally responsible investments. In the case of Regency, for example, the proceeds of its green bond will go into making sure the shopping malls in its portfolios are fitted to standards that reduce energy and water usage among other environment-positive criteria.
Standard & Poor’s released a report in May that said it expected corporate green bond issuance to increase. Up to now corporate green bond issuance totals $10.4 billion. And in April, the first green bond index was launched from German index provider Solactive.
The appetite for socially responsible investing is also driving demand. Initially the domain of equity markets, now, with green bonds, the fixed-income market has begun to take a larger role.
“People began to realize that stocks in companies that were meeting ESG [environmental, social and governance] criteria were performing better over the long term; now that has been applied to bonds,” says Buchta.
Since the greed and exuberance of the crisis, investors also now find some comfort in knowing their money is not just subject to returns/losses, but that they are having a positive social impact.
There is also pressure from government bodies and agencies to tackle environmental and social issues through the capital markets. The UN launched a Principles for Responsible Investing initiative (PRI) that more than 1,200 investors have signed up to, with a combined $34 trillion in assets under management.
Michael Wilkins, an analyst at S&P, points out, however, that there are still challenges for the fixed-income green market. Can investors be confident that the proceeds are going to be used for environmentally beneficial projects?
“Investors in green bonds also want assurance that the proceeds are being used to enable environmentally sustainable outcomes. We therefore expect a revision to standards used for green bond issuance to boost investor confidence, including those governing the use of proceeds.”
Speaking at the UN webinar on how PRI is being implemented within fixed income, Ted Olivier, director at consultant firm Mirador Consulting, said that investors are looking for greater disclosure around the use of proceeds and have suggested the use of auditors.
He also added that while renewable energy seems to be the focus for green bond proceeds at present, research he conducted points to climate-change adaptation strategies being the next area for corporates. “There is a food fight for every green bond issue that comes up.”