Where are the US banks on green bonds?
China and India dominate market; US corporates begin to take note.
Green bond issuance is increasing, and it is Asia that is leading the movement. According to Dealogic, global green bond issuance totalled $30.8 billion in the first half of 2016 – up 84% from $16.7 billion issued in the same period of 2015 and the highest first half-year total on record.
China has a 29% market share for green bonds this year with $8.9 billion in issuance. The US by comparison has seen just $4.9 billion in issuance. The Netherlands ranks third with $3.6 billion.
It is a dramatic turnaround for Asia that until recently had no presence in the market.
“The SRI [socially responsible investing] story in Asia was almost nonexistent three years ago,” says Benjamin Lamberg, global co-head of MTNs and private placements and Asian syndicate for Crédit Agricole Corporate and Investment Bank in Hong Kong.
The only pocket of similar investments was in Japan, he says, where the uridashi market was a reliable source of placement for thematic and green bonds. Now, Lamberg says the region is at a tipping point and he attributes that progress to the adoption by the People’s Bank of China of the green bond guidelines in December last year.
In early July Bank of China launched a $3 billion multi-currency green bond in dollars, euros and yuan with two-year, three-year and five-year tranches. The proceeds will fund eligible green projects in renewable energy, pollution prevention and control, clean transportation and sustainable water management.
“If the political motivation is not there, the business motivation soon will be”
Demand for green bonds from Chinese investors is high. For the Bank of China bond, orders were around $7.8 billion across the tranches. That demand was further evidenced by the New Development Bank’s decision to issue a green bond in yuan in the second half of July. NDB was established by the Brics group of emerging nations and is headquartered in Shanghai. The proceeds of the bond will be used to fund green projects in the Brics countries.
Beijia Ma, an analyst at Bank of America Merrill Lynch in London, says that it is just the tip of the iceberg.
“The Chinese government says it is targeting $46 billion in green bond issuance this year – which is nothing really as it has said it needs Rmb2 trillion [$300 billion] to Rmb4 trillion annually in green investments – 85% of which has to come from private capital,” she says.
She adds that China’s banks and green bonds are seen as the perfect conduit, as, like the SSAs, they can funnel the bond proceeds into smaller green projects throughout China.
Not all investors are happy with China’s green bond guidelines however. As 70% of China’s energy is produced from coal, its green bonds are able to include financing for clean coal. International SRI investors are often restricted from buying coal-related assets. But, says one US banker: “Each country has to start with what makes sense for them. You can’t get to 100% clean and renewable energy without a gradual plan, so it’s far better to support China in its individual endeavours than to expect it to align with the global green bond principles.”
It was India, however, that was the first mover in green bonds in Asia with an inaugural launch early last year. Coupled with the government’s plans to boost renewable energy capacity and to source at least 40% of its energy mix from clean sources such as wind and solar by 2030, bankers say India is preparing to be the second largest green bond market for issuance. In May India’s Axis Bank launched a $500 million five-year bond on the London Stock Exchange.
Whither the US?
So why is the US, which sits between China and India as the second largest emitter of greenhouse gases, not playing a more prominent role in the growth of the market?
US corporates Starbucks and Apple both issued green bonds this year, which should encourage others to follow, but many of the large US banks are notably absent as issuers. Given it is FIG issuers that account for 36% of total green bond issuance in the first half of this year, investors are starting to question why only Bank of America Merrill Lynch and Morgan Stanley have issued green bonds.
One senior banker at a US bank says his firm has not issued a green bond simply because it is “waiting for JPMorgan to issue one.”
Defenders of JPMorgan’s decision and the decisions of Citi, Wells Fargo and Goldman Sachs to lag behind in green bonds, say China and the US cannot be used as comparisons.
Says one banker: “For the large part there is not the incentive in the US for banks to issue green bonds. Whereas in Europe there is motivation from governments and pension funds to mitigate climate change and in China there have been guidelines issued, politically in the US the motivation is far more tempered. There are no benefits and yet many risks, so if you are a large and complex organization why bother?”
Those risks, he points out, include being lambasted by NGOs on the structure and pricing of green bonds and the profits made from climate change-related products. BAML’s Ma however says there is little excuse: “Any company could be issuing a green bond right now. If they are committed to combating climate change, there is really no reason not to.”
That said, US corporate issuers, other than the Wall Street banks, are gaining an appetite for the market and may end up encouraging those slow movers to change their attitude.
Navindu Katugampola, head of green and sustainability bond origination at Morgan Stanley, says most of his bank’s active conversations around green bonds are now with US issuers: “We’re already seeing the domino effect of Apple’s green bond and Starbucks’ sustainability bond, and the US muni market is adopting green bonds. If the political motivation is not there, the business motivation soon will be.”