Green finance has become a central topic in capital markets, with several green bonds and other sustainable or socially themed financings being launched every week.
All the signs are that this is going to become even more ubiquitous in 2018, and that this method of financing is going to gain more official support.
A green or social bond issuance programme has been a must-have for supranational and agency issuers for several years. It is now becoming one for commercial banks; and it is moving on to the agenda for sovereigns.
Poland, France and Fiji have issued in the past 15 months, Nigeria’s debut is expected imminently, and countries such as Malaysia, Hong Kong, Belgium, Sweden, the Netherlands, Italy and Luxembourg are all thinking seriously about it.
Why are all these issuers doing it?
There are three basic reasons. It projects what the organisation is doing to help the transition to a greener or more socially just economy on to the big, outdoor screen of the capital markets for all to see. It gives the finance teams at companies and state bodies a way to help with the transition.
And it’s a great way to market a bond — in many cases, making it appeal to investors that would not otherwise have looked at it twice.
The way all this works and how you go about issuing a green bond are becoming something that a treasurer may now be slightly embarrassed to admit ignorance of.
That mainstreaming is likely to lead to an ever-increasing flow of issuance. Some $100bn of green bonds were issued in 2017, and Sean Kidney, CEO of the Climate Bonds Initiative, says: “We expect the total market to double in 2018.”
One thing that has made it easier for investment banks to convince issuers to go through the hassle of structuring a green bond is pricing.
Green bonds should logically be priced more tightly than equivalent normal bonds because they offer the investor something extra — and for years it has been clear that this was happening. But the subject was taboo, among investors, investment banks and even issuers. All of them were frightened of admitting it, lest it put off end investors and hamper the market’s growth. Now that taboo has been shattered — the ‘greenium’ is openly discussed, even promoted by bankers.
One public sector issuer puts the benefit at 2bp — it is probably more for higher spread names. For the moment this is not big enough to hang decisions on. But the conversation about issuing a new product for the first time is a lot easier if there is even a smell of a cost advantage.
Market with a destiny
Are all these green bonds helping us reduce global warming? Most are not, because the issuers could borrow money easily anyway. Any funding cost advantage is only a rounding error, compared with the costs and returns on which any industrial investment is assessed and approved.
The exception is issues where a weakish borrower can reach investors that otherwise would have looked down their noses at it.
Other developments in the intersection between climate and finance may prove more consequential, such as the growing pressure on organisations to disclose to investors what their plan is for climate change — such as by following the recommendations of the Task Force on Climate-Related Financial Disclosure.
But the enormous interest in green bonds and other green finance suggests this is a market with a destiny.
Kidney’s vision, shared by some other supporters, is that a mass market evolves, which is so big, liquid, well organised and accessible that those wanting to make green investments, large and small, find it an easy, cheap and reliable source of funds.
Official status and financial incentives, however unnecessary and fraught with difficulties, would certainly help the market achieve that ambition.
Already China allows mid-tier banks access to liquidity lending windows if they use green bonds as collateral, while Singapore pays for the cost of independent reviews. More governments around the world are likely to use measures like these, and even tax incentives.
Policy support is on the agenda now in the European Union, with support in the European Parliament and from Valdis Dombrovskis, the financial services commissioner. It would be unwise to bet on any incentive actually materialising soon, but the conversation is going that way.
A precondition for incentives, in any country, will be defining green — and the European Investment Bank and China Green Finance Committee have already begun to try and write a common language in which such definitions can be written.
Change often needs carrots and sticks. The green bond market is trying to grow a big, juicy carrot that can tempt organisations to move ahead with the green transition.