Global green bond market tipped to reach US$100bn in 2017, with China seen maintaining its lead

PUBLISHED : Friday, 23 December, 2016, 5:55pm
UPDATED : Friday, 23 December, 2016, 10:30pm

Global issuance of green bonds could expand more than 20 per cent to US$100 billion in 2017 after almost doubling this year, with China expected to maintain its global lead in the sector, according to deal arrangers.

“We expect China’s green bond market to keep growing with an estimated issuance of US$30 billion next year, and a strong increase in corporate issuance is expected,” Benjamin Lamberg, global co-head of medium term notes and private placements at French-based Credit Agricole CIB, told the South China Morning Post, adding that he expects next year’s global total to reach US$100 billion.

Green bonds, which finance carbon emission reduction and climate change impact mitigation initiatives, are a relatively young but fast growing fund-raising tool.

Global issuance surged from around US$12 billion in 2013 to US$42 billion last year after minimal volumes were recorded between 2007 and 2012, according to a report by Bank of America Merrill Lynch, another major green bond issuer.

“The green market started in 2006 with only about US$1 billion of issuance by some supranational bodies such as the World Bank,” Lamberg said. “It started as a marketing strategy as if a bond packaged into a green bond would make it easier to sell. Nowadays, the green bond market has become mature and it is not about marketing anymore.”

Bankers said more issuers have realised the commercial benefits of green financing, even as green bonds have been generally priced in line with comparable non-green issuances, although the issuers must bear some additional set up and assurance costs.

Jonathan Drew, who leads HSBC’s Asia Pacific sustainable financing business, said the costs can readily be justified by the investor engagement benefits that come from issuing in green format.

The assurance costs of US$20,000 to US$30,000 for a green bond are tiny relative to the overall bond costs, especially for large and frequent issuers that can spread some of the costs over multiple transactions, he added.

“In addition, green bonds provide a financial platform for issuers to diversify their investor base and communicate how they are driving cost reductions and efficiency enhancements in their operations,” he said.

“We see that green bond issuers are typically leaders in their fields that are good at managing their costs and at growing revenues from businesses in low carbon sectors, which will over time enable them to deliver better financial performance.”

For the first 11 months of the year global issuance has already reached US$76.3 billion, data from financial market data provider Dealogic showed.

China rose to the top spot in spectacular fashion, having registered only US$1.29 billion worth of deals last year, but US$32.6 billion in the first 11 months of 2016, equal to 42.7 per cent of the world total.

“China has grown from almost no issuance two years ago to the world’s largest green bond issuer this year,” Laurent Morel, Asia Pacific head of debt capital markets at French bank Societe Generale, told the Post. “China wants to remain a leader in green financing, and Beijing will still be providing a lot of support for green bond issuance … whereas Europe is already at a more mature stage.”

Morel expects China to remain a leader next year, accounting for around 45 to 50 per cent of global green bond issuance, valued at between US$85 billion to US$100 billion.

Bank of America Merrill Lynch thematic investment strategist Ma Beijia attributed China’s rapid rise as a green bond issuer to pro-active government support and the nation’s huge funding needs to clean up the environment.

Beijing’s publication of detailed green bond issuance guidelines a year ago also helped.

In the past two years China accounted for one out of every three dollars invested in clean energy technology and renewable energy projects globally, and over the next 10 to 15 years the country is expected to be responsible for one out of every two incremental dollars spent on these segments, Ma told the Post, citing data from Bloomberg New Energy Finance.

Although China’s green bond issuance this year is just shy of half the amount predicted by a key green finance official, she noted that there is ample room for growth given the nation’s huge spending needs on environmental protection.

Ma Jun, chief economist at the People’s Bank of China, was quoted by the 21st Century Business Herald to have projected in March the nation would see 300 billion yuan (around US$43 billion) of green bond issuance this year, slightly more than last year’s global total.

Ma early this year also said in a television interview that the nation will need to spend two trillion to four trillion yuan on projects to cut air, water and land pollution.

State funding can provide no more than 15 per cent of the funding needs, with the rest to be financed by the private sector through the banking system and the green bond market, he estimated.

Despite the green bond market’s breakneck growth to an outstanding total of US$160 billion, it is still only a fraction of the so-called “climate-aligned” bond world and the even bigger bond universe that exceeds US$100 trillion.

A report commissioned by HSBC and prepared by Climate Bonds Initiative (CBI) – a London-based non-profit body promoting green bonds – estimated in July this year that some US$694 billion of climate-aligned bonds were outstanding, mostly issued by firms whose principal business activities result in low carbon emissions or facilitate carbon reduction by other firms.

CBI’s funders include HSBC and Bank of America Merrill Lynch.

China has grown from almost no issuance two years ago to the world’s largest green bond issuer this year
Laurent Morel, Asia Pacific head of debt capital markets, Societe Generale

While their proceeds are also used to finance low carbon and climate change-resilient infrastructure, they are not labelled as green bonds, which require issuers to meet disclosure requirements on the use of proceeds, the process of project selection and reporting on project execution.

Such disclosures are necessary for investors to evaluate the environmental impact of their green bond investments, and facilitate transactions by moving the market towards standardised disclosures.

However, disclosure requirements and eligibility criteria sometimes differ among countries and regions, making it challenging for investors to compare the “greenness” of bonds across markets.

For example, in China green bonds are allowed to fund cleaner consumption of coal by preventing emissions, large hydro power plants of over 50 mega-watts capacity, and bonds with not more than 10 per cent of the proceeds allocated for “general corporate purposes” rather than disclosed green assets.

But they are not eligible to be labelled green under the internationally accepted “green bond principles”.

According to the tally by CBI, some US$78.9 billion of green bonds issued globally so far this year met both CBI and Chinese definitions. CBI excludes nuclear and fossil fuel projects from being labelled green.

The volume rises to US$91.5 billion if only the Chinese definition is used.

Of the US$78.9 billion total, only US$6.65 billion are “climate certified,” which requires verification by a third party that provides an assurance report stating that the bond meets certain environmental requirements. Further, issuers must also make annual post-issuance climate impact reporting.

The limited number of “certified” green bonds has deterred some investors from putting more money into the financial product, as they still lack confidence in non-certified bonds.

A survey by HSBC earlier this month found that two-thirds of its 276 institutional investor respondents were willing to make more green investments, while less than a quarter of its 277 corporate respondents had disclosed their environmental impact.

“A large portion of institutional investors have indicated their support for action to address the negative impacts of climate change,” CBI said in a statement on its website.

“However ... when it comes to environmental criteria, investors currently have too few tools to help ensure that their investments are really making a significant impact.”

Credit ratings agency Moody’s introduced its ratings system for green bonds in late March, while in September Standard & Poor’s announced plans to launch a new tool to assess the environmental impact of projects financed by green bonds, as well as another tool for evaluating firms’ environmental, social and governance performance.