The green bond market is coming of age. From its origins in 2007/08 with issuance from the multilateral development banks, the market has grown to a total of $65.9bn (£42.1bn) of bonds outstanding, after annual issuance tripled in both 2013 and 2014.
The green bond market now encompasses a range of issuance, including corporate, municipal and project bonds, and asset-backed securities, as well as development bank bonds.
Labelled green bonds are bonds that allocate proceeds to green projects, with a majority of bonds focusing on projects with climate change benefits. From a credit perspective, green bonds are competitive with non-green bonds, as they are backed by the full balance sheet of the issuer. The comparable pricing makes the green benefits a bonus feature for investors.
The pool of issuers with a sufficient asset base to issue green bonds is wide, as proceeds can either fund new green projects or refinance existing ones. A large share of green bonds are expected to be used for refinancing, as this is generally the main role bonds play in the capital pipeline for corporates and projects – banks are better placed to take on the risk in the early stages of a project.
With bonds available for refinancing, firms can take on short-term bank lending for the higher-risk construction phase of a project, knowing that bonds can provide a lower cost of capital following the completion of construction. This will also be the central role of bonds and how bonds will lead to a greater number of green projects going ahead.
But the rapidly growing labelled market is only the tip of the iceberg when it comes to bonds with positive climate benefits. There is also a separate, larger category of unlabelled climate-aligned bonds, which comply with green criteria but are not labelled as green.
This unlabelled category accounts for a further $531.8bn of outstanding bonds, making the total size of the climate-aligned bond universe a whopping $597.7bn, according to the latest report from the Climate Bonds Initiative (CBI). This is a significant increase from the $501bn identified in 2014, with the labelled green bonds accounting for the majority of the growth.
Labelled green bonds are used to finance projects in an increasingly diverse range of sectors, although energy and buildings are dominant. More than a third of labelled green bond proceeds are financing renewable energy, according to CBI data. Notable issuers of green bonds purely to finance renewables so far in 2015 include Vestas at £358m, KfW at £282m and Terraform at £511m. The second biggest use of proceeds relates to buildings and industry at 28 per cent, with the bulk of this financing low carbon buildings. Increasingly, green bonds are also financing water, transport and waste projects.
Another trend is that we are now seeing green bond developments in emerging markets, with Europe and the US having dominated issuance in the early years of the market. In February, India’s Yes Bank kicked off by issuing the country’s first green bond, with the country’s Export-Import Bank following shortly after. In June, food company BRF issued Brazil’s first green bond – although in the European market rather than the domestic one, while the first labelled bond from Chinese issuer Xinjiang Goldwind came to market in July.
The green bond is growing in size, diversification of issuer types, investment areas, countries and currencies. This means the market offers an increasing multitude of investment opportunities, which will only continue to expand in the coming years.
Key Takeaway: The green bond market has boomed in recent years, with more providers coming to the fore and outstanding debt now amounting to £597.7bn. Issuers are starting to emerge outside of Europe and the US, targeting a diverse range of projects.
Beate Sonerud is policy analyst at the Climate Bonds Initiative.