A “green” bond market has taken root this nyear, with municipalities and corporations issuing new environmentally-focused bonds and money managers jumping in tobuy them.
But it’s too soon to tell whether all the new activity – less than a sliver of the $91 trillion worldwide bond market – will send much new money to projects like efficient buildings and better water systems.
Instead, the new bonds reflect the complexities of using finance to address issues like climate change. While the sale of notes termed green bonds tripled to $35 billion worldwide in 2014, many are bonds that might have been sold anyway without the label, and which trade at terms comparable to non-green bonds. Nor is it clear the new bonds are “green” in the environmental sense that investors may expect, and issuers face only voluntary standards so far. Participants say that to avoid the impression that green bonds are just a marketing ploy, they still need to show more corporate treasurers and investors the bonds can make it easier to fund projects, a corner they have not yet turned.
“If people think this is just to raise the flag, it’s not going to last long,” said Christopher Flensborg, Head of Sustainable Products and Product Development for Skandinaviska Enskilda Banken AB, the Swedish bank that’s the world’s largest underwriter of green bonds.
Still, the spike in new activity shows some success to date, with new issuers and new buyers. Green bonds used to come exclusively from AAA-rated organizations like the World Bank; the last year has seen rising issues of green bonds from municipal issuers as well as some from corporations that are rated junk.
On the buy side, State Street Corp has filed a registration with the US Securities and Exchange Commission to run what could be the first green bond index fund. Also, since July Bank of America Corp, Standard & Poor’s and Barclays MSCI each have launched new green bond indexes that may form the basis of future mutual funds and exchange traded funds. Corporate and municipal issuers started issuing bonds they labeled as “green” in earnest last year, when they realized that they could pull in some new buyers who wanted to invest environmentally.
“We thought the worst thing that happens is we get more people interested in our bonds” said Alan Westenskow, a Zions Bank vice president who works with municipal issuers. He advised the Utah Associated Municipal Power Systems on a $21 million offer this month to pay for systems to turn waste heat to electricity. The offering, made in several sections, pays a coupon ranging from three per cent to five per cent.
Spanish clean energy company Abengoa Greenfield, a unit of Abengoa SA issued its first high-yield green bonds in September – a 500-million-euro issue in all. A representative said “90 per cent of our projects qualify as green projects, so why not issue a Green Bond?” Still unclear is how much extra demand the green label creates. The Abengoa representative said the company didn’t have information on the extra demand. A spokesman for Bank of America, which underwrote the Utah bonds, said executives there would not comment on demand.
In August 2014, the first wave of corporate junk green bonds entered the mix, when an affiliate of Princeton, New Jersey, power producer NRG Energy Inc sold $500 million of senior notes to pay for the purchase of the Alta Wind Energy Center, a wind farm in California. (Reuters)