Can the green bond market be the corporate solution to climate change?
Climate change is not fake news. With the 80 degrees weather in the early February, it is hard to ignore the impacts of these extreme weather on not just our economics, but also in our society. In the light of saving our planet, investors from all sectors including university endowment or government are all calling for fossil fuels divestment and instead, invest in green bonds.
So what exactly is a Green Bond? Functionally, a green bond (or a Climate bond if it targets climate change specifically) is just like any other debt instrument that offers a fixed return to the investor. However, the capital raised by the issuers is used to finance or refinance projects with sustainability goals – such as renewable energy, carbon emission reduction, and even biodiversity. The market has gained enormous momentum since the European Investment Bank issued the first green bond of €600Mn in 2007, and the annual issuance for 2019 is projected to reach $180Bn this year according to S&P Global Ratings (1)(2).
Though the definition of green bonds is almost entirely subjective, the International Capital Market Association has published the Green Bond Principles (GBP), outlining a voluntary set of process guidelines for issuers to follow. Meanwhile, a Climate Bond Initiative has been established to standardize such procedures and approve certain financial advisors (such as JPM, HSBC and more) rights to certify or issue the bond that complies with such standards (3). However, even if it seems like a win-win situation to incentivize corporates to develop sustainable projects, almost ⅔ of the issuers came from the sovereign or supranational organizations (4)(5). Before dissecting the reasons as to why there is hesitation from the corporate sector, we need to understand the basic driving factors of demand in the market.
From the market demand perspective, institutional investors invest in green bonds as they start to set sustainability targets for their investment. With the global economy gradually growing interest in sustainable industries such as electric vehicles, investors see green bonds as a way to directly engage with the future market trends. In addition, countries such as China and Egypt are also placing a strong emphasis on the green bond market, which encourages investors to invest in those projects with interests that align with governments. However, the market is still not yet mature – the credit risk for investing in such bonds are just as high as other corporate bonds (as risk is still valued based on their balance sheets). Moreover, green bonds are often longer-termed bonds that lack liquidity and tax incentive. Another factor is that these bonds only require voluntary monitoring on the projects, so green bonds investors can worry about where the proceeds from the bonds end up going. While the suppliers of the bonds – the corporate issuers – are encouraged to develop more green projects, the process of getting certified and underwriting a green bond is complicated.
The future growth and maturation of the green bond market are certainly unquestionable, but currently, the market still lacks interests from the major investor along with the absence of corporate motivation. To tackle the pressing climate crisis, governments and supranational must encourage all sectors to participate and engage more with sustainability goals.
Edited: Jenna Yun
Sources:
(3)https://www.climatebonds.net/certification/approved-verifiers
(4)https://www.climatebonds.net/files/reports/cbi-green-bonds-highlights-2017.pdf
(5)https://www.youtube.com/watch?v=gLT2zOL6jOM
(6)https://www.wsj.com/articles/it-isnt-easy-being-green-for-a-bond-etf-1544410920
