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Banks and companies were able to sell $175 billion in green
bonds through the end of August 2021 that were "fitted" with
investments in climate risk reduction and climate-focused,
clean-technology solutions, an IHS Markit analysis of the market
shows.
The 14 September analysis shows that a green bond market has
evolved since 2020 that appears to be characterized by especially
low interest rates, in part because the debt is explicitly linked
to investment in climate-favorable projects, according to IHS
Markit Climate and Cleantech Executive Director Peter Gardett, who
analyzed bonds issued between March and September of this year.
Bonds are issued by companies, municipalities, sovereign states
or sovereign-backed banks, and other financial institutions as a
form of debt that is not a loan or other fixed-income product.
Green bonds typically are issued to fund large-scale,
capital-intensive green infrastructure projects such as energy
efficiency, transit, or renewable power projects that result in
positive environmental outcomes, including climate benefits.
IHS Markit analyzed a subset of more than 140 separate green
bond sales in 2021, examining their use of proceeds, language, and
their product-level alignment with climate risk reduction
methodologies, relying on guidance provided by International
Capital Markets Association green bond principles.
Gardett found that the green bond market is oversubscribed owing
to the push for clean energy solutions as part of the transition to
a net-zero economy, and because it has evolved from what he called
"a 1.0 state of broad and unstandardized tagging of existing bonds
to a much more sophisticated and fitted 3.0 state during the summer
of 2021."
Evolving market tied to climate-friendly
solutions
While the $175 billion in fitted green bonds IHS Markit
identified since March is small in size compared with the more than
$3 trillion tagged at one time or another as "green," it represents
"a key evolution" in capital markets that more closely ties
investment capital with deploying clean energy technology and
reducing climate change risk, Gardett and CleanTech Research
Director Conway Irwin wrote in a 14 September report.
The analysts say the emergence of fitted green bond debt came in
response to demand from investors who wanted to allocate funds to
clean energy technology and from asset managers who in turn sought
financial products that actually reflected cleantech and climate
change risk.
"Investors buying green bonds faced a fundamental problem of
risk mismatch with product, as existing debt instruments failed to
properly ringfence the climate change risk or cleantech deployment
risk within companies," the analysts added.
According to the IHS Markit report, the 1.0 version of green
bonds was merely a case of reclassifying existing securities, while
the 2.0 version earlier this year saw more bonds linked to
companies pursuing Paris Agreement-aligned net-zero targets. The
latest 3.0 version, which IHS Markit said drew the $175 billion in
debt between March and August, has companies linking debt to actual
projects reducing climate risk or investing in clean
technology.
Deustche Bank role
The IHS Markit report cites Deutsche Bank as an example of an
entity that has evolved in how it classifies its green or
sustainable debt.
In August, the US Securities and Exchange Commission began
investigating the sustainability claims of fund manager DWS, which
is publicly listed but roughly 80% owned by Deutsche Bank. DWS has
€820 billion ($969 billion) in assets under management.
Gardett noted DWS allegedly took "a largely 1.0 approach" to
environmental sustainability and governance (ESG), "answering
retail investor enthusiasm for firms that reduce climate,
transition, and governance risk by reclassifying existing
securities as ESG-compliant under its own methodology."
In contrast, Deutsche Bank on 30 August issued a $200 million
green bond for a 35-year term that Gardett described as the 3.0
version because proceeds from this transaction are to be used to
fund eligible green assets, including renewable energy projects
such as wind or solar power plants and the improvement of energy
efficiency in commercial buildings in Taiwan.
More conservative
IHS Markit's estimate of the size of the $175 billion fitted
green bond market is more conservative than the $207.02 billion in
green bonds reported for the same March-through-August time period
by the UK-based Climate Bond Initiative (CBI), which has been
tracking green bonds since the European Investment Bank issued the
first one in 2007.
The difference, however, lies in how CBI and IHS Markit have
chosen to define green bonds and track their proceeds.
CBI includes bonds when 95% of their proceeds are explicitly
linked to climate-focused projects as well as when those projects
have been certified by independent third parties, but it covers a
larger universe of projects than those tracked by IHS Markit, such
as water monitoring, recycling, walking and biking infrastructure,
and telecommuting. IHS Markit's definition is focused more on
projects that result in clean energy installation, emissions
reduction from a shift in energy sources, and use of
renewables.
Surge in 'fitted' green bonds
There's no question that both sets of analysis illustrate a
surge of interest in green bonds among investors.
In a 31 August report, CBI said green bonds reached the $227.8
billion mark at the end of the first six months of 2021, which is
more than halfway to its original 2021 forecast of $400
billion-$450 billion, and three-quarters of the way to 2020's total
of $297 billion.
As of 10 September, CBI said the green bond total reached $279.8
billion, which included $23.3 billion in certified climate bonds,
and $256.5 billion in debt that the organization said is aligned
with its definition of green.
IHS Markit's Gardett also noted that the fitted green debt
market kicked off September with over a dozen major bond offerings
worth $13.9 billion in the month's first 10 days.
Investors purchasing these bonds are citing new EU standards
that require explicit links between capital raised and the green
projects funded, he said.
Germany, EU lead among sovereigns
Indeed, the IHS analysis shows that banks and companies in the
EU have been leading this trend, issuing 49% the $175 billion of
fitted green bonds between March and September, while borrowers in
North America have played catch up through the summer, bringing
their share up to 27%. The Asia Pacific region's share of these
bonds stood at 19%.
Among sovereign countries, IHS Markit analysis shows Germany
issued the largest individual green bond of $4.6 billion at a
minimal interest rate of 0.39% for a 30-year term in May, but the
EU tallied the highest value of green bonds, totaling about $16.9
billion.
JP Morgan, Goldman Sachs, and Bank of America were the
top-ranked banks for helping companies issue green bonds, IHS
Markit's analysis shows. "Finding them there wasn't as surprising
as finding Credit Agricole, Santander, and BNP Paribas among the
top issuers," Gardett said.
The smaller European competitors had a head start in fitted
green bonds because European policies gave them clear signals on
developing methodologies and matching cleantech pipelines, and
those European banks have managed to maintain a meaningful
footprint as the green bond market has expanded, he added.
European companies, but also US firms, snagged low rates for
long-term green bonds, with the help and participation of
high-profile underwriters.
In June, Enel raised $3.96 billion at nearly
zero rates in a triple-tranche, sustainability-linked bond sale to
move forward with decarbonizing its assets. Banca Akros-Gruppo
Banco BPM, Banco Bilbao Vizcaya Argentaria, Banco Santander, BNP
Paribas, CaixaBank, Crédit Agricole, Deutsche Bank, Goldman Sachs,
ING, Intesa Sanpaolo, JP Morgan, Mediobanca, Natixis, Société
Générale, and UniCredit acted as joint bookrunners for Enel's bond
issuance and tender offer.
The US Securities and Exchange Commission is expected to propose a climate change risk
rule by the year's end and a final rule thereafter in 2022 after
evaluating the comments it receives on the proposal, potentially
encouraging use of green bonds by regulated corporations. Switzerland has also indicated
plans to issue a climate disclosure rule, as has Singapore Exchange. The UK has proposed a climate
disclosure rule while the EU has issued guidelines that need final
approval.
"With greater insight into companies' climate change risk
profiles, increasingly, fitted green bonds will be one tool issuers
can use to fund cleaner asset mixes and lower emitting portfolios,"
the report said.
Posted 16 September 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst