Even bonds are going green. These investment securities, whereby entities can borrow capital by issuing bonds to investors, have not been impervious to the steady march of sustainability, and the popularity of green bonds is now at a tipping point.
Since the first issuance of green bonds by the World Bank in 2009, the market has grown exponentially, with almost $300 billion of green bonds issued globally in 2020. Europe now leads the way in the green bond market, with European issuers accounting for more than half of the 2020 market.
Despite the impact of Covid-19, in 2020 market issuance of green bonds was second-highest year-to-date, at over $220 billion, says Ryan McGrath, head of fixed income strategy and sales with Cantor Fitzgerald.
“Companies and governments are expected to issue $500 billion in green bonds in 2021 due to large EU issuance, given that the EU has said it will launch €225 billion worth of green bonds as part of the €750 billion borrowing that will fund its Covid-19 recovery plan,” he explains.
But what makes a bond green? Essentially, it means the proceeds will be applied exclusively to fund green projects, explains Richard Kelly, partner in finance and capital markets at legal firm Matheson. Eligible projects include those relating to renewable energy, energy efficiency, pollution prevention, sustainable agriculture and land use, clean transportation, green buildings and sustainable water and waste management.
Companies are increasingly prioritising environmental, social and governance (ESG) projects to deal with the risks and opportunities facing their businesses, Kelly notes.
“Issuing a green bond to finance these projects represents a visible commitment to ESG principles,” he says, adding that investors have a large appetite for green bonds as they integrate sustainable and impact investing criteria into their portfolios. There are other benefits: this can sometimes mean lower borrowing costs for a green bond issuer.
Socially responsible investments
McGrath agrees, saying clients are increasingly demanding socially responsible investments and now require asset managers to integrate ESG factors into the investment process. Countries are also issuing green bonds to help finance environmental capital investment projects.
“Green bonds have helped to diversify the traditional fixed-income investor base by attracting new types of investors,” he says. “Green bonds are often more expensive than comparable regular bonds as they now tend to trade with a green premium, known as the ‘greenium’.”
But despite their growing popularity, McGrath points out that green bond issuance still represents just a small fraction of overall market borrowing. He says the European Central Bank (ECB) has been a leader in trying to increase awareness of green bonds.
“The ECB already holds green bonds amounting to 3.5 per cent of its own funds portfolio and has pledged to make tackling climate change a major part of the central bank’s strategic review of its remit and tools, which is due to be completed by the second half of 2021.”
Ireland was in fact one of the first countries in the EU to issue a green bond and has remained at the forefront of developments in this space, he says. “In October 2018, the Irish government raised €3 billion issuing Ireland’s first-ever sovereign green bond and Cantor Fitzgerald Ireland acted as a co-lead manager on the transaction,” McGrath says. Since then, the size of Ireland’s green bond has increased to over €6 billion, with strong demand from the Cantor Fitzgerald global client base, he adds.
Increasing numbers of Irish entities are issuing green bonds, Kelly agrees. “Euronext Dublin [formerly the Irish Stock Exchange] is a leading stock exchange for green bonds and a centre of excellence for debt listings. There are 420 ESG bonds listed on Euronext from 150 issuers across the globe including government-backed entities, financial institutions and corporates,” he explains.
In recent months, both Bank of Ireland and AIB have launched green bond frameworks and have issued green bonds, with the proceeds being used to finance green projects. Additional Irish green bond issuance in the medium term has also been hinted at by the National Treasury Management Agency (NTMA) – this will be instrumental in achieving Ireland’s 2030 emission-reduction targets.
However, disputes about project eligibility have been an ongoing source of contention. Kelly says that, in response, the International Capital Markets Association (ICMA) published a set of “green bond principles” (GBP) to promote consistency in the green bond market, and issuers generally publish a green bond framework to demonstrate that their green bond complies with the principles.
Sustainability bonds, where the proceeds are applied to both green and social projects, are also becoming more commonplace, while sustainability-linked bonds are beginning to emerge – these are where the proceeds may be used for a variety of purposes but the characteristics of the bond, such as the interest rate, can vary depending on whether pre-defined sustainability goals are met.
Prof Andreas Hoepner is professor of operational risk, banking and finance at University College Dublin (UCD). Hoepner serves on the European Commission’s platform on sustainable finance and is careful to highlight the lack of a uniform green bond standard within the EU as of yet.
“The GBS currently under development heavily relies on the EU’s taxonomy on sustainable activities,” he explains.
Fabiola Schneider, a doctoral researcher at UCD’s Michael Smurfit Business School who supports Hoepner on the platform, says the risk of “greenwashing” is thus very real.
“In the media, there’s a lot of debate on the taxonomy and the influence on it from lobbying. The risk of greenwashing is ever increasing and that will also affect the credibility of Europe as a leader in sustainable finance. It is crucial to take a stand against the watering-down of green definitions and not let lobbying get in the way of science-based solutions.”