The sovereign, supranational and agency (SSA) issuer base is without doubt the pioneer of the green bond movement. But as corporations and banks have joined the fray, a major component of that original issuer base has not come on board.
This week, a German agency priced its third green bond, last month saw the highest-ever green bond volume with several issuers achieving firsts in terms of currency, size and innovation. But still there are no sovereign green bonds to speak of.
A common argument for sovereigns’ reluctance to enter the market is that it is more difficult for them to segregate assets for green financing than it is for a supranational or agency. Those latter issuers have specific loans they can compartmentalise for green bond funding — while sovereign issuance tends to be for general funding.
That may be true, but the difficulties must pale into insignificance when compared to the work required to mitigate climate change as a whole. Doing the necessary treasury work to get a green bond ready cannot be nearly as difficult as trying to shift a country’s energy usage to renewable sources, for instance.
That excuse also seems limp when more and more governments are waking up to the potential for green bonds to help combat the threat of climate change. Some, such as China, are even talking about regulating the market.
Whether or not more stringent government oversight will help the instrument develop, it appears contradictory that governments — the only organisations with the real power to tackle climate change — recognise the value of the green bond market but have done little to boost issuance.
There were hopes from some green bond market participants at the start of the year that issuance could reach $100bn this year. Despite the flurry of deals in October and several more trades lining up in the pipeline, it looks unlikely that volumes will reach much more than half of that this year — if at all.
Sovereigns entering the market could easily make that $100bn dream a reality in 2016, and add prestige to the asset class, by linking it to the largest, most regular and tightly priced issuers in the bond markets.
Some SRI investors have told GlobalCapital that they are unable to fill their portfolios with truly SRI bonds and have to rely on government paper to fill the gap. Imagine if suddenly they could offer their end accounts a true SRI product, with green government bonds providing a hefty source of supply.
And the timing will never be better.
The United Nations Framework Convention on Climate Change begins in Paris on November 30. As the eyes of the world turn to that meeting, what better moment to give the symbolism of the green bond market maximum exposure through the first ever sovereign deal?
Rich countries are already shirking on their promises to help developing nations mitigate some of the dangers of climate change. They have much work to do in what will surely be the most important public policy movement of the 21st century.
Providing a shot in the arm to the green bond market is one of the simplest steps they can take — and there is no excuse for further delay.