The ups and downs of green bond issuance
Green bonds have held up relatively well in the market turmoil of recent weeks.
The ICE BofA Green Bond Index lost 5% in total return between the end of February and March 20, while the broader ICE BofA Global Corporate Index was down 11%.
Much of this outperformance down to the defensive nature and higher ratings of the constituents of the Green Bond Index compared with its corporate counterpart: the former includes a significant number of industrials and utilities.
Unsurprisingly, UBS analyst Thomas Wacker says his team expects green bonds: “To exhibit lower volatility and smaller drawdowns compared to non-green bonds during periods of market stress.”
However, green bond issuance has been quieter due to market volatility. There has been a recent flurry of investment grade issuance from blue chip corporates such as PepsiCo and Unilever as firms try to lock in funding in anticipation of prolonged market disruption.
However, just $1.8 billion in green bonds was launched in March according to the Climate Bonds Initiative. That’s significantly lower than in February and January, which each registered over $15 billion in issuance.
“We’re still seeing frequent issuers accessing the market,” says Cristina Lacaci, head of green and sustainability bonds at Morgan Stanley, “but we do expect a slower pace in the short term with a pick-up later in the year.”
In addition to the market volatility, she points to the practicalities of structuring inaugural deals while people are working from home as a possible reason for a slowdown. “But there are still utilities and companies in other sectors that will finance their green capex through green bonds,” Lacaci points out.
Angel Tejada, head of green and sustainable bonds at BBVA, says issuance is beginning to pick up again, adding that his firm is also expecting green bonds, and ESG (environmental, social and governance) financing more broadly, to outperform.
“It’s not a niche market anymore,” says Tejada. “Last year green bond issuance was around $320 billion, which was 5% of all fixed income issuance – during some months the percentage of ESG issuance was higher, with around 10%. Some issuers may be making some different financing decisions right now to respond to their Covid-19 needs, but we fully expect them to resume green bond issuance afterwards.”
While green bonds may be a little muted (apart from Engie, E.on or Iberdrola’s green bonds that priced recently), issuance of social bonds and sustainability bonds is ticking upwards.
According to data from BNP Paribas, social bond issuance reached $8.1 billion at the end of March compared with $5.2 billion at the end of March 2019. Sustainability bond issuance in the year to date has been more than double that of last year, reaching $15.97 billion at end of March compared with $7.28 billion in the same period in 2019.
“Last year, the breakdown between green and social bonds was about 80/20 – as of now it is about 60/40. This is a trend that will be important in the following weeks and months,” says Tejada.
Last year the breakdown between green and social bonds was about 80/20 – as of now it is about 60/40- Angel Tejada, BBVA
Agencies and supranationals, such as the International Finance Corporation (IFC) and the African Development Bank, are leading the issuance of sustainability and social bonds to finance their responses to the Covid-19 crisis.
The International Capital Market Association recently put out guidelines on how social bonds could be used during the crisis. Among eligible social projects it listed Covid-19-related healthcare and medical research, investment in additional medical equipment, manufacturing facilities to produce health and safety equipment and hygiene supplies, as well as specific projects designed to alleviate unemployment generated by the crisis.
For those issuers without a social bond programme in place or where issues don’t tick every box to meet social bond criteria, other similar bonds are being launched. The Nordic Investment Bank (NIB) announced a €1 billion three-year response bond last week. The proceeds will be used to finance eligible projects to alleviate the social and economic impacts of the pandemic in the NIB’s member countries and support their recovery process.
Jamie Stirling, head of sovereign, supranationals and agencies (SSA) DCM at BNP Paribas, which was a lead manager on the deal, says there have been several deals related to Covid-19 responses that range in their specificity of social impact.
“Austria’s bond is being used to finance a Covid-19 response, for example, but did not provide key metrics,” he says. “On the other end of the spectrum you would see the IFC social bond that lays out how it will measure use of proceeds. NIB’s is closer to the latter with a clear use of proceeds, but it didn’t meet all the criteria of a social bond.”
Stirling says he is expecting more similar issuance to that of the NIB and the bond could be: “The new benchmark for issuers without social bond programmes or that cannot meet all the social bond framework criteria.”
Tejada says he anticipates financial institutions to follow SSAs in turning to social bonds for projects that directly mitigate the effect of the Covid-19.
In terms of pricing, Lacaci points out it is hard to definitively show that sustainable bonds are achieving better pricing than non-green/sustainable bonds because of the volatility in the markets. “The market environment is different day to day and it’s quite early to draw conclusions on the exact ‘greenium’ achieved in recent green or sustainability bond issues. But so far, we can say that they are getting a lot of support.”
While it appears that social bonds might now outpace green bond issuance in the coming months, Susan Barron, global head of green and sustainable capital markets at Barclays, says that there isn’t competition between the products.
“People forget that green, social and sustainability bonds are very complementary. You won’t find a green bond that has an adverse impact socially, for example. Nor will you find a social bond that is detrimental to the environment. The two have outcomes that work towards the same broader goals,” says Barron.
The connection between social and environmental issues is being highlighted by the current crisis. Pfizer’s bond provides an example of solving for both sides. At the end of March the biopharmaceutical company launched a $1.25 billion sustainability bond, the proceeds of which are to help finance the company’s environmental impact and to support increased patient access to Pfizer’s medicines and vaccines, especially among underserved populations.
Speaking of the bond, the firm said in a statement: “Recognizing the profound societal and public health impacts that may result from environmental issues, including climate change, our company purpose ‘breakthroughs that change patients’ lives’ guides our actions to mitigate our climate impact, conserve the use of natural resources and reduce waste arising from manufacturing of medicines and vaccines.”
As the lines blur between green and social, BBVA’s Tejada says he has seen some socially responsible investors make the switch to buying broader ESG investments during the crisis and that this will become more prevalent in the coming months.
BNP Paribas’ Stirling also points out that for the NIB bond some investors moved their usual parameters in order to include it in their funds.