27 January 2016

Green Bond comment - January

"It's tough to make predictions, especially about the future"
- Yogi Berra

Predictions are a bit of a mug's game. There were some overly optimistic forecasts that there would be $100 billion of issues in 2015, which proved wide of the mark.

A year on, there are numerous bullish predictions about the prospects of the green bond market for 2016.

A newly released report from HSBC's climate change centre of excellence predicts between $55 billion and $80 billion of issues this year, up from $41.8 billion last year. The report also says that Moody's believes $100 billion of issues is possible.

Green bond pioneer Christopher Flensborg at SEB, meanwhile, predicted between $80 billion and $100 billion. This time last year, he predicted $70 billion for 2015, but over the summer revised this down to between $50 billion and $70 billion.

Happily, 2016 has got off to a rip-roaring start, perhaps helped by the landmark climate change agreement in Paris.

Figures compiled by Environmental Finance's small but dedicated team of green bond aficionados suggest that some $3.6 billion of green bonds have already settled so far in January, up from $2 billion in the same month last year.

And there has been a couple of monster issues announced from China in recent days, which have yet to show up in the figures.

Shanghai Pudong Development Bank (SPDB) has issued the biggest ever green bond today, raising RMB20 billion ($3.03 billion). And Industrial Bank is set to raise RMB10 billion in its inaugural issue tomorrow.

Now that China has come up with its green bond standards, this is expected to be a sign of things to come. The country will inject significant volume into the green bond market this year, meaning that the predictions mentioned above could be justified.

It's a similar story in India. The country has hugely ambitious targets to install 175GW of renewables by 2022 and has also come up with green bond standards of its own. Expect to see renewables developers tap the green bond market in their droves in the near future.

Another significant development in recent weeks has come from Moody's. The rating agency is consulting on its own Green Bond Assessment methodology.

As the analysts at HSBC point out, this has the potential to boost the green bond market, particularly in the US, where many of the players are not familiar with the second-party opinion providers.

I have been surprised that it has taken so long for one of the ratings agencies to step into this space.

The argument up until now had been that the ratings agencies should stay away until there is evidence that the green credentials of a bond impact its creditworthiness. But I think for many investors and issuers, it could make sense for a green assessment to be delivered by a familiar party that is already coming up with a credit rating.

The Moody's assessment will use the Green Bond Principles' list of eligible sectors as its basis for assessing a bond's use of proceeds, which means it does not have to opine on what is green.

Overall, these developments, along with the continued progress being made with the Climate Bonds Initiative's standards, mean that the ecosystem around green bonds continues to evolve.

Meanwhile, I note with interest that the HSBC report names Unilever's £250 million green bond in a list of issues it considers to have strong green credentials. Unilever's green bond was excluded from the Barclays/MSCI green bond index on the grounds that energy efficiency upgrades to existing buildings were not green enough.

I always felt that Unilever's green bond was hard-done-by in this regard and I hope it finds its way into the index as excluding it sent the wrong message to the green bond market.

Debates about 'what is green' will continue to rage in 2016. And that's about as much of a prediction as I am prepared to make.

Peter Cripps