This analysis is by Bloomberg Intelligence analyst Gregory Elders. It appeared first on the Bloomberg Terminal.
October 18, 2016
Green bonds grow but struggle to move past environmental niche
Green bonds offer a way to fund the $12 trillion needed in clean energy investments over the next 25 years to help meet agreed goals to combat global climate change. But many potential issuers seem hesitant to dive into a market that offers added costs and unclear benefits. Over $150 billion in green bonds have been issued since 2010. China’s entry into the market has fueled a majority of issuance growth this year as European and U.S. issuers’ initial enthusiasm has tapered.
China leads in green bonds as issuance surges past 2015 record
Over $50 billion in green bond issuance this year has already surpassed the 2015 full-year record and is about double last year’s pace through the end of September. China has led growth, responsible for 31% of 2016 issuance from virtually nothing previously. China’s government-backed green bond guidelines published at year-end 2015 started the wave, which may stay high given the September publication of green financing guidelines promoting environmental infrastructure and investment.
Green bond early bloomer frost weighs on market growth prospects
Initial green bond infatuation by issuers appears to quickly cool, with market growth coming from new countries or issuer types rather than past markets. This may point to growth limits for green bonds without a compelling financial reason. China is the latest country to drive growth. Supranational development banks led initial growth, but their trailing-12-month issuance peaked two years ago. European issuance growth has slowed the last two years, and the U.S. isn’t far ahead of its year-ago pace.
Credit Agricole narrows BofA’s lead in green bond underwriting
Credit Agricole is the only one of the top five green bond underwriters to increase market share this year as issuance shifts to China. Chinese banks are swiftly moving up the green bond league table as the market takes off in the country, overtaking U.S. and European issuance. Bank of America Merrill Lynch retains its lead since last year as the largest corporate and government green bond underwriter, ahead of Credit Agricole and JPMorgan, who have all surpassed their 2015 underwriting deal value.
Green bond assurance wanes as issuers opt for more disclosure
Green bond issuers are opting to skip third-party assurance on their environmental bona fides, offering more disclosure on project selection and use of proceeds instead. Avoiding the added cost of assurance, though it’s relatively small, may ease one of the hurdles for green bond issuers. Offering transparency on projects financed may provide enough assurance for environmentally-minded investors. Less than half of 3Q green bond issuance by value received third-party assurance, down from 72% in 2015.
Issuer green bond certification interest lags raters’ enthusiasm
Assuring the environmental benefits of green bonds is gaining ground as ratings firms and auditors look for new revenue streams, but such assurance may be racing ahead of issuer demand. S&P Global announced a green bond evaluation methodology in September, following Moody’s earlier this year. In addition, sustainability rating agencies and the Big Four auditors offer assurance services. Green bond assurance has declined this year as new issuers, particularly in emerging markets, have shown less interest.
“Clean coal” is something most climate-concerned investors would avoid due to its carbon emissions, which is allowed under China’s green bond standard, but not by others. Research group Cicero has provided the most green bond assurance this year by issuance value, followed by Ernst & Young.