Mounting anticipation of tougher international action on climate change at the UN meeting in Paris, has brought an Indian summer to the green bond market, says Graham Cooper
A second strong month in the green bond market, after a lacklustre summer, has seen new issue volumes in 2015 already surpass last year's total. And market insiders are bullish about prospects for next year.
As of 24 November, new bonds worth more than $40 billion had been issued, Marilyn Ceci, managing director and head of green bonds at JP Morgan, told a seminar at lawyers White and Case in London. Environmental Finance estimates this year's total at $40.829 billion, compared with about $36.6 billion last year.
While the rate of growth has slowed after the market trebled in size in both 2013 and 2014, a flurry of activity ahead of the UN climate change meeting in Paris has seen 17 new issues already this month, worth a combined $8.8 billion.
But "size isn't everything," Ceci added, noting that the market's growth in breadth and geographical reach leaves it well placed for further expansion. It now boasts a far wider range of issuers, a variety of credit qualities, and many more currencies and maturities than 12 months ago, and "there is potential for much faster growth in 2016," she said.
Emerging market bonds are likely to be a prominent feature of the market next year, Sean Kidney, CEO of the Climate Bonds Initiative, told the seminar.
November saw two developing country issuers come to market for the first time – the Development Bank of Mexico and the Industrial Development Bank of India, with issues of $500 million and $350 million respectively.
Kidney is confident there will be more issues from China in coming months and market rumours suggest green bonds could also be forthcoming from a railway company and, more controversially, a coal-based power generator, both in India.
In the West, meanwhile, new issue rumours are currently focussed on BNP Paribas and HSBC. Both are heavily involved in the market as underwriters but are yet to issue their own green bonds. HSBC revealed last week that it "is considering a series of green bonds", and has created a framework to facilitate such issues, which has been assessed by second-opinion provider Cicero.
German mortgage lender Berlin Hyp is also hoping to return to the market with more green covered bonds after issuing its first green Pfandbrief in April. Bodo Winkler told the London seminar that the issue had been a success and he hoped other banks would follow suit, but he noted that the covered bond market has been distorted by heavy buying from the European Central Bank under its quantitative easing programme.
The Nordic Investment Bank also plans to step up its green bond programme and intends issuing the equivalent of around €700 million each year in coming years, Jens Hellerup head of funding, told Environmental Finance.
New bank issues in November included Societe Generale, with its €500 million ($543 million) "impact bond" and ING with an inaugural $1.33 billion two-tranche green bond, which was heavily oversubscribed.
Another first-time issuer that received an enthusiastic reception was US power generator Southern Power. Its bond, also issued in two tranches, was increased in size to $1 billion after being nearly five-times oversubscribed. The proceeds will be used to finance Southern's push into renewables.
Among repeat issuers in November, this year's two biggest green bond players – the European Investment Bank and German development bank KfW – both returned to the market with significant transactions. The former made a private placement of an unusual index-linked €500 million bond, taking its total issuance for the year to $4.34 billion.
KfW, meanwhile, issued its first dollar-denominated bond of the year – a five year, $1billion deal – and also priced its €1.5 billion issue that was launched in late October. These leave it in second place, with issues this year totalling $3.95 billion, according to Environmental Finance data.
A clear signal from Paris that international action on climate change mitigation and adaptation is about to undergo a step-change should further enhance the already favourable market conditions. After all, as Kidney said "the world is awash with capital" and "not for at least 150 years has there been a better time to invest in infrastructure."
But some warn that care is required to ensure the fledgling market retains its reputation. "Without some form of market or regulatory intervention, the risk is that the market is going to end up being a mixed bag, and then it will never recover its credibility," Julien Bras, socially responsible investment portfolio manager at Allianz, warned recently.