The green bond market has come a long way since the first issue in 2007 – a Climate Awareness Bond from the EIB.
The market may still be niche, but at the time of writing there was $168 billion of issues outstanding, according to Environmental Finance's Green Bond Database.
One of the key features about green bonds is that they are typically significantly oversubscribed.
Investors are looking to respond to climate change but they are often unsure how to respond within the constraints of fiduciary duty.
The beauty of the green bond concept is that green bonds share the same risks and rewards as mainstream paper issued by the same entity. This makes it easy for an investor that wants to take action to buy a green bond. And any company can issue a green bond, as long as it has some form of green capex or cashflows.
But it has only been in the last five years that the market has gained significant traction.
There are signs that the market is beginning to influence behaviour in a number of interesting ways. The green bond market has:
- moved discussions about green up the boardroom agenda.
- boosted the debate around the environment and finance, generally.
- encouraged lenders to start analysing their loan books to look for green loans. In some cases, such as Berlin Hyp's covered green bond, we are seeing that it is encouraging lenders to offer cheaper loans to green products to help them grow their pipeline so they can issue more bonds.
- allowed issuers to diversify their investor base. This can be very useful to some companies, as it can allow them to raise some capital that they may not otherwise have been able to.
- driven innovation, as potential issuers look for ways to tap the pent-up demand for green bonds. We have, for example, seen green bonds that finance research and development.
- led to the creation of green bond funds and mandates from investors.
- helped drive communication within issuing organisations, sometimes bringing together different departments that don't often communicate frequently. Some issuers even say that the process of issuing a green bond has boosted staff morale.
- driven collaboration. The green bond market has seen competitors work together through initiatives such as the Green Bond Principles.
- increased the level of communication between investors and issuers. Many investors say that issuing a green bond is a good indication that the company is thinking about long-term environmental issues. While a green bond shares the same credit profile as the non-green bonds from an issuer, the fact that it has issued a green bond at all can have a positive impact on assessment of the credit-worthiness of the issuer.
- spurred research and development of tools as to how to assess the impact of investments.
There is also anecdotal evidence that green bonds have occasionally gained a few basis points of cheaper funding both in the primary and secondary market, but such claims are contentious.
The first 10 years have been a huge success, steering billions of dollars of capital towards all kinds of green projects.
This market is evolving incredibly quickly and I would not seek to predict what developments will be seen in the next decade.
At Environmental Finance, we feel privileged to play a role in this global phenomenon. In recent years we have not only aimed to make ourselves the market-leading news and information service for green bonds, but have also launched our own database of all labelled green bonds to try to boost information about the market.
We will continue to try to serve the market – let's hope it keeps us worked off our feet for years to come!
Peter Cripps is the editor of Environmental Finance
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