Among both issuers and investors, demand for climate-friendly bonds continues to rise.
Ten years after the World Bank issued the first “green” bond, the market for these eco-friendly investment products is finally showing signs of maturity. And there’s good reason to believe it’s just getting started.
Today, corporations, municipalities and banks are under pressure to prove they are responsible global citizens. Issuing bonds that fund sustainable, climate-friendly projects allows them to reap those benefits while future-proofing their operations and infrastructure.
Recently, the market has shown exponential growth. The total value of green bonds issued in 2017 reached $161 billion, up 74% from 2016, according to Moody’s and the Climate Bond Initiative.1 This year, according to the same source, that number is projected to reach $250 billion.
The market may have taken longer to develop than first expected. But there is now a healthy combination of factors in place—some that pull, others that push—that should ensure the market’s robust growth as it enters its second decade.
On the pull side is increased demand, both from issuers and investors. Issuers generally look to diversify their investor base, and green bonds are a great way to attract environmental, social and governance-minded customers. Since July 2017, the number of dedicated green-bond funds has grown to 38 from 24, an increase of 58%, according to Environmental Finance, an online news and analysis service. Over the same period, total assets under management in dedicated green-bond funds have risen to $5.34 billion, according to Environmental Finance’s Green Bond Database.2 Clearly, investors want to buy these sorts of products, and that’s reflected in the asset landscape.
On the push side, you have regulators and policymakers supporting this market. A lack of regulation and definitions are frequently cited as impediments to green-bond growth, but more and more countries are taking steps to change that. The European Commission took a leadership position with the release of its March 2018 report, “An Action Plan on Financing Sustainable Growth,”3 a roadmap of reforms for green financial products that include taxonomies, standards and best practices.
Individually, countries such as France, the U.K., Germany and Sweden have all recently issued guidelines aimed at driving a green transition. In August 2016, China released its own set of guidelines and policies, further enshrining green investment as part of the country’s national development strategy. These guidelines and policies are critical to driving investor confidence and helping issuers track their progress against environmental policy goals.
What does all this mean for issuers and investors eyeing the green bond market? There are three major trends worth noting.
First, the types of issuers entering the market will continue to broaden. Corporations, transportation agencies, utilities and airports have all embraced this form of debt to fund their transitions to renewable energies. We’re also now seeing the emergence of a sovereign green-bond market: In the past 18 months, Poland, France, Belgium Indonesia, Fiji and Nigeria have all issued sovereign green bonds.
Second, many of these issuers are returning to the market for second and third transactions. Rather than admire them as a museum pieces, issuers are treating green bonds like a regular part of their financing toolkit. This will eventually establish a green-bond curve that each issuer can use to set future pricing, a sure sign of maturity for the market, and a sign that issuers view it as a regular option when thinking about their financing.
Third, the success of green bonds is driving acceptance of the fixed-income market as the natural home for environmental, social and governance investing. For years, the equity market has been at the forefront of this movement. But issuers can return to the bond market anytime they need to refinance debt or raise new money, making it the natural place for them to highlight their sustainability strategies and partner with investors for the longer term. There is significant value in the fixed-income market taking the lead here, and green bonds are helping asset managers warm to the idea.
There are factors that could potentially put a lid on this market. Issuing a green bond is a lot of work because of the additional reporting requirements. There’s still no obvious pricing advantage. And eager investors may still find a dearth of investable product.
But that lack of supply, coupled with growing demand, could entice an even greater range of issuers to enter the market, which may persuade more asset managers to dedicate more capital to the space. That sort of virtuous circle could ultimately be a powerful catalyst for continued growth.
It’s taken a while to get here, but the recent success of this relatively young market should alleviate any doubts about its long-term prospects. As long as sustainability and climate change remain global priorities, you can expect green bonds to be part of the equation.