Green Bond Comment, February 2018

Sovereign issuers gave a major boost to the green bond market in February, with inaugural issues from Belgium (€4.5 billion) and Indonesia ($1.25 billion) and a repeat issue from Poland (€1.0 billion).

And the trend looks set to continue, as Hong Kong announced plans to enter the market, to the tune of up to HK$100 billion ($13 billion), Nigeria pledged to return to the market with a much larger issue than its debut NGN150 billion ($30 million) deal and Belgium said it expects future taps of its first issue to take the total size up to €10 billion. Rumours are also circulating that a second bond from Fiji is in the offing.

The announcements from Hong Kong and Indonesia reflect the growing importance of Asia in the global green bond market.  Following the initiative of Singapore, both Hong Kong and Tokyo have committed to stimulate the market with subsidies for some green debt issues. 

Asia is currently the fastest growing region for new issuers, according to Trisha Taneja, head of sustainable bonds, Americas and Asia Pacific at Sustainalytics, a leading provider of second-party opinions.

To help potential issuers and investors understand the risks and opportunities in the Asian region, the IFC and Environmental Finance will be holding their first Green Bonds Asia conference in Singapore on 7 June.

A sister event in California recently also heard about optimism in the US market, despite the lack of federal action on climate change.

"I believe the bond markets – and specifically green bonds – are an essential tool in raising the capital necessary to finance our transition to a low-carbon economy," said state Treasurer John Chiang. 

A follow up report by the Milken Institute will make recommendations about how California can help support the market's future growth.  The state is the biggest issuer of green bonds in the US, with more than 35 bonds issued since 2013, worth a total of almost $6 billion.

A growing focus on green infrastructure and energy efficiency is likely to stimulate more US corporate issues, according to ratings agency S&P Global, although the rapid growth of the green 'muni' market could be hit by federal tax reforms.  The value of self-labelled green muni bonds soared by 43% to $10.4 billion in 2017, the agency said.

In a separate note, S&P said it also expected green bonds to play an increasingly important role in bank borrowing, in response to investor pressure and regulatory changes. 

In Europe, meanwhile, market participants are eagerly awaiting the European Commission's Action Plan on Sustainable Finance. Most expect it to endorse the key recommendations of the High Level Expert Group (HLEG), most notably the creation of an official European standard for green bonds. This would involve making mandatory the recommendations of the Green Bond Principles (GBPs) on issues such as disclosure of the use of proceeds, impact monitoring and reporting, and external reviews.

HLEG said there is currently insufficient disclosure and data on how green bonds lead to the scaling up of investments in green projects and activities, and also called for all providers of second opinions to be accredited.

If the Commission does adopt the group's recommendations, investor confidence in the still-immature market should get a significant boost. Yield-hungry funds will also be pleased to see Natixis' re-packaging of France's green government bonds into callable structured notes. 

Potential issuers, meanwhile, should be heartened by research from NatWest Markets showing that green bond issuance frequently leads to tighter pricing of a company's entire debt portfolio. 

In further signs of the market's growing maturity, South Africa's first corporate issue came to market this week, along with the first issue from Lebanon. Peru also dipped its toe in the water when the Lima stock exchange said it would publish green bond guidelines later this month. The imminent launch of the IFC/Amundi $2 billion emerging market green bond fund promises to accelerate many similar initiatives. 

Further evidence of the growing importance of the market came in our annual Green Bond Awards which this year attracted some 220 submissions, more than twice last year's total.

The winners will be announced on 28 March.

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