Green bond issuance has fallen short of estimates in 2015. While key market figures claim to be unconcerned and amid expectations for a flurry of new deals in the run up to the COP21 meetings in Paris, global banks are jostling for the best investment opportunities.
Several banks have made commitments to the market. Barclays recently reached a £1 billion green bond investment target set in September 2014 and has allocated a further £1 billion to the sector.
“We are confident in the market. This was always intended to be a permanent commitment, not some passing trend,” says Stephen McDowell, managing director of funding and short-term investments at the bank.
However, the slower issuance this year compared to the rapid growth in preceding years is troubling.
“It hasn’t been a struggle to reach our target because we gave ourselves enough time when we made the commitment, but it was more difficult than perhaps anticipated due to lower issuance in the market than expected,” says McDowell.
On November 12, HSBC pledged to commit $1 billion to the market. It said it would invest in “high quality liquid assets in the form of green, social or sustainability bonds,” perhaps deliberately steering clear of binding itself to green bonds only.
Deutsche Bank said in February that it intended to channel €1 billion into green bonds. At the time it aimed to establish a specific green portfolio “to support the development of the green bond segment”.
This makes the $34.96 billion total issuance as the end of year approaches, compared to $36.59 billion last year, a concern.
The bank recently reached its €1 billion target, to little fanfare. Despite saying all investments were executed “as planned”, Deutsche has decided not to pledge further funds to the market at this time.
“We are open to further investments and will continue to monitor the market, but no further block investment target beyond the €1 billion has yet been set,” says Thomas Hyde, liquidity portfolio manager at Deutsche.
However, all is not lost for the green bond market. Some large bonds have been issued this year, and banks are clamouring to be organisers – both factors that indicate confidence in the market.
German development bank KfW issued its third green bond of the year in October. Originally offered at €1 billion, the bond was 2.4 times oversubscribed. The final settlement was €1.5 billion. Rated as AAAe (Fitch) and Aaae (Moody’s), it offered an annual coupon of 0.125% and matures in five years. Crédit Agricole CIB, HSBC and SEB were joint bookrunners.
According to the Climate Bonds Initiative, JPMorgan topped the underwriter league table for Q3 this year, although Bank of America Merrill Lynch remains in pole position in the year-to-date rankings.
Barclays remains positive about the market’s development. “We always thought if the market grows, we’ll grow our commitment,” says McDowell. “The market has in fact stood still in terms of primary issuance year-on-year, but still the universe of bonds is getting bigger as more and more primary deals come so from that perspective we are happy to renew the commitment.”
|Ulrik Ross, HSBC|
Ulrik Ross, global head of public sector DCM and sustainable finance at HSBC, says the issuance picture this year does not alter the bank’s green investment plans.
“The time frame has not been set,” says Ross. “We have invested close to one third of the $1 billion in green bonds, so we are well on our way. It is important that we invest within our current liquidity and regulatory guidelines so we can maintain a high quality in our books.”
Banks are supporting the green bond market for a variety of reasons. For Barclays, they form part of its regulatory asset buffer.
“Three years ago I changed jobs and became involved in looking at the bank’s liquid asset buffer,” says McDowell. “At the same time Barclays was making some serious changes around its place in society and to its values. I realised green bonds were the perfect opportunity, we could use the bank’s capital and liquidity to really make a sustainable difference here as part of these broader changes.”
For Deutsche, the effort to boost the green bond market formed part of its corporate social responsibility agenda. “Our commitment supports the green bond market by demonstrating to other banks that these are prudent liquidity investments eligible for treatment as high quality liquid assets,” says Hyde.
HSBC’s Ross say his bank’s $1 billion investment target is the “natural next step” in its work to further the transition to a low carbon economy.
Those who have made firm pledges hope others will follow suit.
McDowell at Barclays says: “We would love other banks to join us in this type of commitment, we need to collectively move the market forward. Every bank has a liquid asset portfolio like we do. We advise other banks to take this market seriously, it does need more capital in it and getting involved in it is getting a lot clearer and easier.”
While Deutsche’s Hyde says: “We encourage other banks to invest in the green bond sector. With more investors committing to the sector – particularly banks – market depth and liquidity will continue to improve leading to a sustainable green bond market, which benefits both issuers and investors.”
While waiting to see if other banks will add to the liquidity picture, there are nerves about becoming an over-bearing presence in this relatively small market with over-sized commitments.
“We’re not putting an end date on this second investment commitment,” says McDowell. “No one else has done that so we are trying to be more in line with our peers and make sure we don’t end up dominating the market, which is not our intention.”