There is little doubt that the green bond market is on the rise, but both issuers and investors will have to take care as the market comes under greater scrutiny in the remainder of the year. After ten years of steady growth, the market is worth over US$150bn and there have been calls for greater regulation.
The recent introduction by the International Capital Market Association of Social Bond Principles to stand alongside the existing Green Bond Principles means that there is increasing scrutiny relating to these instruments.
Some feel that this is long overdue since companies offering green bonds may not match up to investors’ principles in other areas of their operation including employment practices. The success of the market means that some companies may be guilty of box-ticking when issuing a bond which takes advantage of the popularity of green and social bonds. A good example was the recent analysis of the €500m issue by oil giant Repsol when questions were asked about the company’s own plans for a low carbon business model.
Some popular nostrums relating to green bonds may then need to be challenged. In particular the ESG credentials of the issuer as opposed to the use of proceeds. Social Responsibility Investors were keen on Repsol but balked when green bond indices were reluctant to include it.
The result is that many investors will demand that issuers meet minimum ESG standards focusing on sustainability. The EU is leading the way on standardisation but other regulatory bodies are keeping a close eye on developments in sustainable finance and are categorising bonds accordingly.
The Geneva-based International Standards Organisation (ISO) is also working on standardising green bonds and China has recently fallen foul of their regulations, suggesting market regulation, however loosely based, is impacting on the green bond market.
When it comes to these standards, they must be flexible and allow the markets to develop the sector while offering investors confidence and fostering trust in the issuers.
Despite this increased oversight of the market, it remains buoyant around the world in both the sovereign and corporate sectors.
Sovereign bonds are burgeoning, with France and Sweden leading the way in Europe, although two years ago the unlikely Poland Green Bond surprised observers. Africa and South America have also appeared in recent months as keen advocates of green bonds, although the use of the funds has come under scrutiny.
Green bond funds
Asia and the Pacific region have also been very active over the past two years, although the steam has gone out of the Chinese engine which was driving issuance, with the numbers over the past 18 months down on the peaks of 2016. It is thought that there is a something of a logjam in China, with the remainder of 2018 likely to see a rush of new bonds hoovering up investment in the coming quarters.
Japan is also expected to establish itself in the marketplace in the wake of new national standards on green and social bonds. There has been a steady stream of bonds in recent months and again the next six months should see more. India similarly is expected to be active, having established national standards.
In Australia it is four years since the NAB issued its first certified climate bond to fund green energy programmes. Further issues have followed, and the bank has updated its Green Bond Framework in June this year to back up confidence in new bonds and notes it has in the pipeline. Last yeat QBE Insurance issued its first green bond and followed it in 2018 with the issue of a Gender Equality Bond.
On the corporate front, there have been a significant number of dedicated green bond funds set up and industry insiders believe they have got off to a good start. Investors are being offered a wide range of bonds to add to their portfolios and because of the nature of the issuers, this has not impacted too much on diversification. This was an issue in recent years as many of the funds were centred on alternative energy options. Continued diversification and improvement of choice will help to drive the market forward, especially if the industrial sector can be brought on board by complying with the new standards.
The Paris accord could yet help here, encouraging companies to examine what a green bond means and how it may benefit their business and its investors. Neither can the impact of technology be underestimated either as it is a major driver of the low-carbon economy.
All in all, the future looks bright, as well as green.
Simon Lynch is the owner of Treasury Talent.
Treasury Talent is a specialist treasury talent, recruitment and search provider solely focussed on the treasury market with offices in Sydney covering Australia, Singapore covering Asia, and San Francisco covering California and the USA. To make contact email@example.com