The Future of the Green Bond market 2.0
The year 2019 has become a record year for the green-bond. As of October 2019, there are over $200 billion of green bond issuance, and the expected total issuance is $250 Billion by the end of 2019. To compare, the issuance as of September 2019 has surpassed $173Bn, which is the total amount raised in 2018.
Under classic portfolio theory, investors often seek out investments that yield the highest return with the lowest risk. As ESG (Environmental, social and corporate governance) investing has gone mainstream due to growing public awareness, some investors have turned away from traditional vanilla corporate bonds and steadily picked up interest in green bonds. The additional non-financial value has therefore fuelled the rapid growth in the green bond issuance. In the simplest terms, there are increasing numbers of investors willing to sacrifice the yields and take on green bonds. According to Morningstar, ESG funds have attracted almost doubling amounts of net inflow in 2019H1 compared to the total amount in last year ($9 billion versus $5.5 billion in 2018). Another research conducted by Climate Bonds Initiative, an organization that focuses on drifting conventional capital market interest in fighting climate changes, also shows that investors with over $45 trillion assets have committed to climate and responsible investment, underlying the further progressing in investors’ demand.
As a result, the suppliers (bond issuers, who are usually the governments, development banks, and large corporates) are incentivized by the lower borrowing cost (the bond yield) and chose to engage in projects that fulfill the green bond principles over conventional projects. New countries and repeat green bond issuers were the two main reasons behind supply growth. Apple also issued $2 billion of green bonds (raising its total to $4.7 billion since the first issuance) to support their new sustainable supply chain management projects. Apple is showing that companies no longer treat green bonds as a PR image enhancement tool but rather a regular financing instrument for their increasing green awareness. The sectors of issuers have also broadened and diversified; even Emory University has issued its first green bond in 2019 with an “AA” rating by S&P.
ESG investing has gained its acceptance in capital markets, yet new problems such as “Greenwashing” also appeared in this new space. Issuers might take advantage of the loose regulation on the use of proceeds and rephrase their project to match with the green bond principles. However, with increasing spotlights drawing on the maturing green bond markets, bad market players will eventually be driven out by the invisible hands. More corporations and governments that actually care about the environment will be left in the market and hopefully contribute their shares in creating a sustainable future for the world.
Edited by: Belicia Rodriguez
Works Cited:
https://www.ademcetinkaya.com/2019/08/emory-university-gas-2019a-b-bonds.html
