6 January 2016

Green bond market ends 2015 on a high as it breaks records

A spate of green bond issuance ahead of COP21 led the market to break previous records, finishing the year at more than $40 billion.

According to the latest figures from Environmental Finance, $15.56 billion of green bonds were issued in Q4, mainly in November. This helped the sector regain some of the ground it lost in a slow third quarter, when only $6.7 billion of notes were issued.

The flurry of transactions, which included major deals from KfW, EDF and the Agricultural Bank of China, brought the total figure for 2015 to $42.97 billion, beating 2014's figure of $36.6 billion (according to data from the Climate Bonds Initiative (CBI)) and setting an annual record for the market.

The figure still falls short of many predictions made at the start of the year: last January, the CBI predicted $100 billion of issuance in 2015. In August, in light of slower-than-expected growth in the market, SEB revised its predictions down to between $50 billion and $70 billion.


Labelled bonds denominated in US dollars made up most of the transactions in 2015, with 77 deals, spurred on by the growth of the country's municipal market during the year. A further 47 deals were issued in euros and 18 in Swedish krona.

The European Investment Bank (EIB) was the year's largest issuer, selling $4.3 billion of notes in US dollars, Canadian dollars, sterling, euro and Turkish lira, through 11 taps of its Climate Awareness Bonds. KfW was also a top issuer, tapping the sterling and Australian dollar markets for the first time in 2015, and issuing a total of $3.9 billion under its Made by KfW programme.

The two development banks were part of a consortium of 11 institutions that last month launched a revised document providing guidance to issuers about impact reporting, which it hoped would make it easier for companies to come to market. The document was launched in its original form in March.

Aldo Romani, deputy head of euro funding at the EIB, said the market needed "shared standards" and comparable reporting from issuers. He added that "a common reference framework" was required in order to allow for "the provision of trustworthy advice, opinion, certification and ex-post verification services".

The debate around standards was a recurring theme throughout 2015, with some market players arguing that 'pureplay' renewable energy companies should not require the same external verifications that other firms do, while others argued that the market is likely to lose its credibility if strong universal standards are not adopted.

Of the 175 transactions that took place in the green bond market in 2015, 111 included a second-party opinion or third-party verification, according to the figures. US municipals continued to buck this trend, with only two green bonds issued by the sector having any external assessment.

2015 also saw the first ever index-linked green bond fund, launched by State Street in May, and followed by dedicated funds from Mirova, Raiffeisen Bank, SEB, Humanis, Erste, Allianz and Axa.

Barclays upped the size of its pledge to buy green bonds, as it fulfilled its initial £1 billion ($1.5 billion) target, and Credit Agricole and HSBC were among those to make investment pledges for the first time. 

Other hopes for the market were not realised, despite widespread optimism earlier on in the year. In March, Andy Cairns, global head of debt origination & distribution at the National Bank of Abu Dhabi, said he expected the first Sukuk green bond to be issued in 2015, but this is yet to materialise – although Dubai, the UAE and Malaysia are all rumoured to have looked at the asset class.


Some also expected to see the first issue from a sovereign last year, with Sweden rumoured to come to market, but no transactions took place.

A big theme for the year – and one that is slated to continue into 2016 – is pricing. In September, Barclays published a report saying the secondary market for green bonds was seeing investors 'pay up' for labelled notes. Many contested the findings – saying the secondary market is not yet mature enough to draw conclusions about pricings – but some in the primary market, such as HSBC and KfW, also said the green label had prompted better pricing on transactions.

There is optimism from many in the market that 2016 will see a boost in the rate of growth for green bond issuance off the back of the Paris agreement and with increasing tightening of emissions regulation, and the growing interest of emerging markets in the asset class.

The UN's Green Climate Fund, for example, has teamed up with the Inter-American Development Bank to launch a green bond for energy efficiency projects in Latin America and the Caribbean, while China last month launched national standards to help grow the space, India released a draft of its own standards and Mexico is expected to follow suit this year.