Russia’s invasion of Ukraine has also sounded the wake-up call for European energy supplies and brought home the need to stave off our dependency on fossil fuels.
Supporting the energy transition to a low carbon world has become a priority of governments and corporations globally. Estimates by the International Energy Agency (IEA) point to a $4 trillion annual investment worldwide needed in clean energy to reach net zero emissions by 20301.
With the spotlight on sustainable finance to provide solutions that will accelerate the energy transition, green bonds have emerged as one type of investment that can help finance a radical transformation of the energy mix.
The difference is that the proceeds of the green bond issuance go towards financing projects that contribute positively to the environmental and energy transition. This includes the development of zero-carbon mobility, energy renovation of housing and public or private commercial buildings, or the development and storage of renewable energy.
Green bonds are issued by a variety of public and private players, such as governments, corporations, intergovernmental institutions, financial institutions and development agencies. The European Investment Bank and the World Bank pioneered the first green bonds, with the EIB issuing the Climate Awareness Bond in 20072 and the World Bank issuing its first green bond in 20083.
Issuance of corporate green bonds soon flourished, increasing from $27 billion in 2014 to over $34 billion in 20164. Indeed, 2016 was the year that Apple issued the largest ever corporate green bond in US dollars – $1.5 billion – which took many analysts by surprise1. It heralded a genuine milestone for the green bond sector.
One of the projects it funded was a robotic system to dismantle ditched iPhones and salvage recyclable materials, such as silver and tungsten. Apple intended to contribute to the energy transition by researching more sustainable materials for its products and recycling old devices. A year later, Apple issued its second green bond for $1 billion.
Of course, the Russian invasion of Ukraine in February and subsequent European energy crisis, combined with rising interest rates and high volatility, has resulted in decreased bond issuance in general in 2022. According to the Climate Bonds Initiative, new green debt instruments for the first half of the year totalled $218.1 billion – a 21% drop compared to the record volumes of $277.5 billion in the first half of 20215.
However, while the first quarter (Q1) of 2022 saw the lowest volumes since Q4 2020, green issuance picked up in Q2, with $121.3 billion of new bonds debuting – a 25% increase on the quarter5. Ultimately, cumulative, green-themed issuance came close to the $2 trillion milestone, at just under $1.9 trillion5.
As green bonds have a high degree of transparency, investors can, to some degree, quantify the benefits of investing in them using accessible metrics (reduced carbon dioxide, for instance, or gigawatt hours of clean energy produced). This certainly makes green bonds more traceable than traditional bonds.
Agreed standards that make green bonds comparable across sectors and issuers might still be some way off. However, improved reporting and transparency, the rise of more data sources and the standardisation of measurement methodologies will no doubt lead to substantial progress on this issue in years to come.
Ultimately, it falls to the issuer to confirm clear criteria for determining a project’s eligibility to receive financing, as well as strong traceability around the use of proceeds.
The International Capital Market Association’s Green Bond Principles provides guidelines for a green bond issuer, as well as for investors seeking information to assess the environmental impact of their investments. But verifying ‘greenness’ is not an exact science – not every green bond issuer commits to providing annual impact reporting with quantitative impact metrics, for example.
That’s why it’s important to be judicious. And thankfully there are some asset managers that are more selective than others. While some do the minimum of analysis, others stipulates that the environmental impacts of a green bond project must also be sufficiently clear and ambitious to ensure significant progress can be made towards reaching the stated objective.
It’s certainly important to pay close attention to the level of detail and transparency of the impact reporting provided for each project, as this will go some way to quell investor fears of ‘greenwashing’ – the process of conveying a false impression or providing misleading information about how a company’s products are environmentally friendly.
In short, the rapid growth of green bonds shows investors are seizing the opportunity to drive the energy transition. But they are becoming more judicious and discerning too, as they attune to signs of ‘greenwashing. That will become more important than ever as the market continues to mature and diversify, through new issuers, ratings, countries, and sectors.
Green conviction for your fixed income allocation.
- Fixed income – an asset class that pays out a set level of cash flows to investors, typically in the form of fixed interest or dividends, until the investment’s maturity date – the agreed-upon date on which the investment ends, often triggering the bond’s repayment or renewal. At maturity, investors are repaid the principal amount they had invested in addition to the interest they have received. Typical fixed income investments include government bonds, corporate bonds and, increasingly in recent years, green bonds.
- Issuance – the ‘bond market’ broadly describes a marketplace where investors buy debt securities that are brought to the market, or ‘issued’, by either governmental entities or corporations. National governments typically ‘issue’ bonds to raise capital to pay down debts or fund infrastructural improvements. Companies ‘issue’ bonds to raise the capital needed to maintain operations, grow their product lines, or open new locations.
- Net zero – A concept that attempts to describe the balancing of greenhouse-gas (GHG) emissions so that the sum of all GHGs emitted from human activities is zero. The point where we get to ‘net zero’ is the point at which any residual emissions of GHGs are balanced by technologies that remove them from the atmosphere.
- Yield – a measure of the income return earned on an investment. In the case of a share, the yield is the annual dividend payment expressed as a percentage of the market price of the share. For bonds, the yield is the annual interest as a percentage of the current market price
2 Source: European Investment Bank, https://www.eib.org/en/investor-relations/cab/index.htm
3 Source: World Bank, https://www.worldbank.org/en/news/immersive-story/2019/03/18/10-years-of-green-bonds-creating-the-blueprint-for-sustainability-across-capital-markets
4 Source: Natixis Investment Managers, 2017, http://hub.im.natixis.com/en/articles/green.shtml
5 Source: Climate Bonds Initiative, 2022, https://www.climatebonds.net/resources/press-releases/2022/08/h1-market-report-green-and-other-labelled-bond-volumes-reach-4178bn
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