Nearly ten years ago the World Bank issued the first green bond aimed at raising money and awareness for environmentally friendly projects. Since then this type of investment has grown from strength to strength, with the market’s depth and volume expanding rapidly.
Last year, the issuance of green bonds globally stood at USD81 billion,1 which was twice as much as the year before. In the first half of 2017 the market has already reached USD57 billion.2
The prospects for the second half also look bright, with mounting evidence that bonds which back environmental projects do better than conventional issuances.2
“We’re anticipating that the green bond market will grow at about 20 to 30 per cent this year compared to last,” explains Jonathan Drew, Managing Director for the Infrastructure and Real Estate Group at HSBC.
“Early supporters were the multilateral banks, the development institutions and sovereign wealth funds. Now private sector entities are responsible for more than 50 per cent of the issuance,” he explained at the recent HSBC Sustainable Financing Forum.3
In recent times, many green bonds have been oversubscribed4 with a diverse group of players offering them, from Toyota in Japan to Apple in the US, including banks such as HSBC, as well as others in France, Germany and China.
There have been concerns that green bonds might be priced at a premium – a so-called greenium – because there has been such high demand for green debt from investors with an environmentally focused mandate, also there’s the extra cost from more complex reporting. However, these fears have been unfounded.4
“Over the last twelve months we’ve seen an increased flow of investor money into the space pushing prices down to make them truly competitive with conventional bonds,” states Daniel Klier, Group Head of Strategy and Global Head of Sustainable Finance at HSBC.
There’s still a lot more room for growth. To date, green bonds represent only 1 per cent5 of the total global debt market. One country that’s showing incredible promise is China.
It has been at the forefront of this class of debt in a bid to pay for its transition to a cleaner, less polluting economy. In one year, China’s green bond market has reached a size that could have taken others five years or more to attain.6
“China has made extraordinary progress in taking leadership of the sustainable finance market. In 2016, it accounted for nearly 40 per cent of global issuance, having in 2015 been a very small percentage,” states Mr Drew.7
Compared with other bonds, green ones do well in China. The non-performing rate is only 0.4 per cent more than a percentage point below other bonds.8
“Green bonds are superior in quality. Investors are first and foremost concerned about the quality of their asset, which includes price and credit risks,” asserts Yaqin Chen, Head of the Environmental Finance Department at China’s Industrial Bank.
“Environmental and social risks will increasingly become part of the whole risk profile. It’s a factor that you cannot ignore,” she said.
The market is gaining further momentum with many more companies around globe disclosing their environmental, social and governance (ESG) credentials.
- Green Bonds Highlights 2016, Climate Bonds Initiative
- Evidence Mounts for Green Bonds Outperforming Conventional: HSBC, Bloomberg
- Global Green Bonds Mid-Year Summary 2017, Climate Bonds Initiative
- Green Bond Pricing in the Primary Market, Climate Bonds Initiative
- Moody's says green bond issuance set for another record year, Reuters
- Myth buster: why China’s green bond market is more orderly than you might think, Climate Bonds Initiative
- China Green Bond Market 2016, Climate Bonds Initiative
- CBRC pushes green finance, China Daily