Donald Trump's decision to withdraw the United States from the Paris climate agreement has been widely condemned by politicians and executives. But although the move is a step back for environmentalists, there is still enough support from investors and other governments to ensure the continued global development of a thriving green bond market.
With other leading countries like China and Germany reiterating their commitment to the Paris accord, US states like California and New York leading the domestic opposition, and bulge-bracket funds like Fidelity and BlackRock looking to put more money to work to help address climate issues, the future for green bonds still looks bright.
“This is a market that is reasoned out of the interest of institutional investors globally … to try to find a way to address the climate change,” Sean Kidney, chief executive officer of the Climate Bonds Initiative, told the audience at FinanceAsia’s recent Green Bonds conference in Singapore.
“Investors, sitting on some $60 trillion of assets, understand fully the risk of climate change and they are willing to invest," he said.
Green bonds have similar features to plain-vanilla bonds, except the proceeds are used to finance environmental projects or linked in some way to climate solutions. They form part of a relatively new but rapidly expanding type of asset class that has been embraced by some governments in Asia — notably China's — to help fund the transition to cleaner technology.
Green bonds also dovetail with the Paris accord, which commits signatories to cutting greenhouse gas emissions to help limit the global average temperature rise to something "well below" 2C compared with pre-industrial levels. The accord rests on a patchwork of national targets that cannot be legally enforced but can be tracked, putting de-carbonisation at the heart of fiscal policy and incentivising governments to encourage more investment in renewables through green bonds and the like.
Total green bond issuance was $93.4 billion in 2016, according to Moody's. Though miniscule compared with other bond markets, it was still 120% up on the previous year, the rating agency said. Chinese issuers, mainly commercial banks, accounted for 40% of this — and made up 85% of regional volumes.
China takes centre stage
China, the world’s largest emitter of greenhouse gases, went from "zero to hero last year,” Kidney said. Policymakers in Beijing issued detailed green bond guidelines in late 2015, prompting a raft of domestic issues by financial institutions and companies to help finance the development of renewable energy technology and water treatment plants.
That Chinese-led growth has subsided in the second quarter of 2017, prompting Moody’s to cut its estimate for green bond volumes in 2017 to $120 billion from more than $200 billion before April. But some experts think it is a temporary hiccup, much like Trump’s formal US withdrawal.
“China is a big monster in the green bond market, and sovereign and corporate issuers are actively looking for the right market window to launch their deals,” said Huang Chaoni, Asia head of business development of Trucost, a provider of carbon and environmental data and risk analysis, speaking on the same panel. “The fundamentals for green capital remain intact.”
It's a view shared by Kidney, who pointed to the expanding investor base for the product. “Treasurers know the value of issuing green bonds is more than just doing some good PR,” he said. “There is a mandate by the central banks globally, from China to Peru, to buy green bonds.”
In a January interview with FinanceAsia, Herbert Hui, finance director of MTR Corporation, agreed with this point, saying that the subway operator benefited from a wide array of investors in Europe, who have dedicated funds for environmentally-conscious investors.
Global investment managers, including Fidelity and BlackRock, have set up sustainability funds to invest in socially responsible companies. A Singapore-based fund manager with a US fund house said the benefit of investing in green bonds is already an established principle in the West, and Asia is gradually picking up the baton.
The financial benefit of green bonds has been a recurring — although not altogether convincing — topic but as long as investors are comfortable with the structure, they are unlikely to expect an additional return for investing in green bonds.
“In reality, green bonds should not be trading any differently than conventional bonds because that will create an arbitrage opportunity in the market,” the investor said. “For investors, one of the major constraints hindering the green bond market is the lack of supply.”
Even after record supply last year, green bonds accounted for just 1.4% of global debt issuance in 2016, which reached about $6.7 trillion, according to Moody’s. Still, Kidney was more confident than anyone else, suggesting the supply-side problem was overstated and pointing to a strong pipeline of infrastructure projects in Asia.
"I think we have got a few years to go before we have to worry about [the market for green bonds] petering out,” Kidney said.
Impact investing
The hope is that green bonds soon become part of the fixed-income mainstream. As sustainable investing gradually becomes more popular, green bond issuers could benefit from reaching out to a larger group of investors, especially in Europe.
When the Export-Import Bank of India sold the country’s first green bond in 2015, the policy lender said it garnered about 20% more demand from investors, allowing it to tighten its pricing by a few basis points.
MTR Corp, the subway operator in Hong Kong, had a similar experience last year when it made its first foray into green bonds, prompting the issuer to upsize the deal to $600 million from its original target of $500 million.
There are, however, some potential speed bumps along the way.
Taking a broader view, Ray Tay, a vice-president at Moody’s, said some Asian issuers were being held back from selling green bonds by the additional costs involved in hiring an independent opinion provider. Issuing green bonds typically requires consultation from an independent reviewer, and can involve regular audits on the use of proceeds. But he thinks the development of the green bond market throughout Asia will go hand-in-hand with another key area of focus — infrastructure funding.
“Developing a strong local currency bond market to fund long-term infrastructure projects in the region encourages the development of green bonds,” said Tay, who highlighted China’s Belt and Road initiative as one of the projects that needs long-term funding.
In theory, the infrastructure and green bond markets go together well. Aboitiz Power showed the possibilities early last year, when the Philippines power producer used a partial guarantee from the Asian Development Bank to sell a green project bond. But few such deals have followed suit.
In any case, the outlook for the green bond market remains strong. As the world's biggest economy takes a step back from tackling climate change, China has now taken centre stage — and the bond market looks set to come along for the ride.
