Green Bonds Flourish amid Demand for Positive Impact Investing
Roberto Lazzarotto, Global Head of Sales
Issuers and buyers are rushing to tap the market for green bonds, where investment returns and climate action meet
Increased environmental awareness is pushing investors towards so-called green bonds at a record pace, forging a fast-growing niche in capital markets.
Issuance of green bonds, which finance sustainability projects, have reached $88 billion so far in 2017, surpassing the record total of 2016 by 7.5%, data from the Climate Bonds Initiative show.1 The international organization estimates that total issuance of green bonds could reach $130 billion in 2017. Between 2010 and 2013, new bond sales amounted to less than $5 billion a year.
A veritable boom
Green bonds work just as regular bonds, but stand out for raising proceeds exclusively to finance in part or in full new or existing eligible `green’ projects.
Since the European Investment Bank and the World Bank kicked off the first green issue in 2007, interest in the bonds has grown in tandem with institutional investors’, and indeed public opinion’s, alignment with sustainability principles. Their appeal is twofold: achieve financial returns while having a positive impact on society.
The magnitude of the green-bond boom is testified by quarterly activity so far this year. Issuance registered a 94% year-on-year increase in the first quarter of 2017, while the second quarter was 78% higher than the previous year, according to Nordic bank SEB.2
Total cumulative green bond issuance has now reached $309 billion, while the number of issuers is closing in on 500 and range from the whole globe.
A tool to manage portfolios’ emissions footprint
First seen as something of a ‘tree-huggers’ niche when they appeared a decade ago, there is increasing awareness that these bonds represent an opportunity to actively manage the environmental exposure of investors’ portfolios.
Green bonds finance projects such as renewable energy, water treatment and pollution prevention, as well as a wide range of carbon-efficient infrastructure projects, from transportation to buildings. They have enabled reforestation projects, the construction of facilities to prevent climate-related flood damage and the leasing of cars that run on fossil-free fuels.
Behind the upsurge in green bonds lies heightened green infrastructure investment demand, itself underpinned by an increasingly broad confluence of drivers, says Christopher R. Kaminker, Head of Research, Climate & Sustainable Financial Solutions, at SEB.3 Among the latter, he mentions “economic, technological, security, policy, social and green bond-specific forces, alongside increasing appetite from institutional investors.”
Standards monitored by independent bodies
Another benefit of the green bond market is that environmental progress and benefits can be formally evaluated, thanks to standards of transparency, disclosure and reporting. Since 2014, issuers, underwriters and investors can refer bonds to the Green Bond Principles, a set of voluntary guidelines compiled by the International Capital Markets Association. External parties regularly verify and certify issues.
Bonds linked to equity returns
Much like vanilla fixed-income instruments, green bonds offer a coupon and the repayment of the invested capital upon expiration. But increasingly green bonds pay out, instead of a coupon, the performance of a security such as an index or basket of companies or projects.
In June 2015, the World Bank announced its first green bond linked to a STOXX index, when it issued a $50 million, 10-year structured bond tied to the performance of the iSTOXX® Europe ESG Select 30 Index.
Starting from its first step into the field of sustainability in 2001, STOXX now has an ample family of climate-responsibility indices that are suited to determine performance returns for green bonds.
STOXX’s offering includes the STOXX® Global ESG Leaders Index, a representation of the leading companies in terms of environmental, social and governance criteria; and the STOXX Low Carbon Indices, designed to help investors reduce the carbon emission of, and risk within, their portfolios.
As an example, the EURO STOXX 50® Low Carbon Index achieves a carbon footprint that’s about half that of the EURO STOXX 50® Index. The Low Carbon index has outperformed the EURO STOXX 50 in the past three years while showing similar risk characteristics.
An ‘overwhelming’ demand outlook for green bonds
Increasingly, investors realize that they can invest for impact without changing the overall risk-return profiles in their portfolios. Demand for green investments will coincide with increasing supply of green infrastructure projects in coming years as new energy plants, in particular, will be required in both developed and emerging nations.
Demand for new green bonds could range “from reasonable to overwhelming” in coming years, according to experts,4 as new issuers line up from the sovereign, corporate and financial sectors eager to prove their environmental credentials in an ever-growing, green-aware world.
iSTOXX® Europe ESG Select 30 Index
STOXX® Global ESG Leaders Index
STOXX Low Carbon Indices
STOXX ESG Impact Indices
FlexShares STOXX® Global ESG Impact Index
FlexShares STOXX® US ESG Impact Index
2,3 ‘The Green Bond,’ 3Q 2017, SEB.
4 ‘Environmental theme bonds: a new fixed income asset class,’ Sean Kidney, Climate Bonds Initiative; Alex Veys, Beetle Capital; Christopher Flensborg, SEB Merchant Banking; and Bryn Jones, Rathbones.