$7.2 billion of green bonds issued. Market shows signs of
maturity, including more currencies, and non-investment grade
bonds. Emerging market green bonds are ramping up, while
green munis are booming.
by Tess Olsen-Rong, Climate Bonds Market Analyst
The first three months of 2015 (Q1) have seen 44 green bond deals
totalling $7.2bn of issuance. After relatively low issuance in
January the amount of green bonds issued has been climbing each
month, with March three times bigger than January. This year will
be the biggest year ever for green bonds: there’s a healthy
pipeline of bonds in the works and we expect Q3 and Q4 in
particular to be strong in the lead up to the UN COP.
From a slow Q1 2015 start green bond issuance is climbing
To grow a deep and liquid green bond market we need to not only
scale issuance but we also need diversification of currency and
ratings. This was starting to show in Q1 with 11 different
currencies and ratings ranging from AAA to B-.
The big story in Q1 was the growing interest in green bonds in
emerging markets shown by the increasing
commentary on potential green bonds from the Middle East,
China and South Asia. However, it was India who made the
headlines, with the first
Indian green bond issued in February.
The US municipal green bond market continued to grow with water
and green buildings dominating the use of proceeds. One big
difference between US municipal green bonds and other green bonds,
however, is the low uptake in second opinions: none of the Q1
green muni issuances chose to get a second opinion.
Finally, if you think the role of the development banks in the
green bonds is petering out, think again! In addition to
contributing with benchmark issuances, many are increasingly
supporting the green bond market through more specialised
issuances in different currencies and structures, as well as on
the investment side of the market.
Emerging markets: India’s first two green bonds, beating
China to the punch
Low-carbon and climate resilient finance needs to grow fast in
emerging markets with huge levels of investment required by 2050.
The good news is that green bonds offer a potential solution. We
had thought that China would be first of the largest emerging
economies to enter the green bond market, but India beat them to
the punch with a corporate green bond from Yes
Bank. The INR 10bn ($161.5m) bond will finance renewable
Hot on the heels of Yes Bank was the Export Import Bank of India,
with a larger $500m
green bond. The bond will finance renewable energy and low
carbon transport projects – although not in India, but in
neighbouring Bangladesh and Sri Lanka. Policy support for the
low-carbon transition may have been influential in encouraging
these Indian green bonds: India has a target of creating 165
gigawatts of new renewables by 2022. According to Yes Bank, $70bn
of debt investment is required to achieve this goal – meaning
ample opportunities for green bonds! After some lobbying, the
Indian government has become supportive of the use of green bonds
as a tool to meet India’s green financing needs; they have
apparently been asking
Indian Government agencies and development banks to start
issuing green bonds. Expect to see more of green bonds out of
India this year.
But let’s not forget about China. We now expect the first Chinese
green bond mid-year, heralding a rush of green issuance.
Currency diversity allows more investors to gain exposure
in green bonds
Green bonds need to be available in a range of currencies to give
a wide range of investors the opportunity to invest. The bulk of
green issuance continues to be in USD and EUR, but the development
banks have been increasingly issuing smaller green bonds in a
range of currencies including Turkish Lira, Brazilian Reals and
Indian Rupees — in Q1 green bonds were issued in 11 different
currencies. Australian investors were also able to buy the KfW’s
Kangaroo green bond in local Aussie dollars, which proved
incredibly popular. Outside of the development banks, some
corporates also appealed to local investors, such as the
Wallenstam and Vasakronan green bonds in Swedish Kronor. Creating
a deep and liquid green bond market requires currency diversity
and in the past three months we’ve started to see that.
Green bonds were issued across 11 different currencies in
Q1 2015 showing the growing depth in the market – however the
USD and EUR issuance continued to dominate
Non-investment grade: Greater diversity as green bonds
move down the ratings
We’ve also seen more high-yield bonds in the market — another
important indicator of depth. Two of the largest green bonds
(Terraform’s and Paprec’s) in the first quarter were
non-investment grade; and they came from different types of
issuers, respectively a yieldco and a corporate.
Terraform Power Operating (BB-) yieldco hit the market early in
January with a sizeable $800m green bond to finance the
acquisition of renewable energy assets. The bond followed the
successful yieldco green bonds last year from NRG Yield and
Abengoa Greenfield. French recycling company Paprec then issued
its inaugural bond; a whopping (EUR 480m) $523m bond split across
two tranches of EUR 185m/$201m (B-) and EUR 295/$321 (B+).
US munis ramp up issuance, but stay clear of second
opinions, leaving green credentials more difficult to determine
Four US states saw green bond issuance during Q1: Washington
(Tacoma), Massachusetts, Arizona and Indiana. Proceeds from the
green muni bonds are funding a wide range of projects, but are
mainly centred on clean water and low-carbon buildings.
of Indiana joined Chicago and Iowa in issuing a green water
bond; in fact, they did two separate green water bonds within a
month. Now, the green credentials of a water bond can be a tricky
subject: for example, if the investments funded involve long-term
water infrastructure, has exposure to physical climate change
impacts and the necessary adaptation measures been accounted for?
What is the energy intensity, and therefore emissions impact, of
the water infrastructure (this can be very high)? Clean water
provision that involves building infrastructure that ignores
expected changes to rainfall patterns and intensity is frankly
foolish – yet still all-too common. Ditto investments that rely on
increased energy when other options are available, like
To be confident a water investment will deliver positive
environmental benefits, investors need to have access to this kind
of information. We saw an important recognition of this issue in
the recent update of the Green
Bond Principles when the water category was changed from
‘clean and drinking’ water to ‘sustainable’ water. Now we need
more detailed criteria and an independent review model breaking
into the green water municipal markets.
There’s also a growing trend amongst US universities to follow in
the footsteps of MIT in refinancing their low-carbon buildings
through green bond issuance. This quarter, both the University
of Virginia and Arizona
State University jumped on the bandwagon with a $97.7m and
$182m issuance, respectively. Great news – but similar to the
green muni water bonds, we‘d like to see an independent review of
these bonds or at least a commitment to improve and report on the
buildings’ energy efficiency during the tenor of the bonds.
US munis have tended to avoid independent review, and
their dominance in Q1, along with some un-reviewed Indian
issuance, has meant more than half the Q1 bonds were un-reviewed
Development Banks: Playing from both sides by providing
issuance and investment in green bonds, as well as pushing the
envelope on reporting frameworks
Development banks have continued to hold their dominant market
position in Q1 2015. They maintained a 46.2% share of total
issuance - the same as their 2014 share. Development banks
continue to be green bond pioneers, and are now finding ways to
support the market other than simply issuing large USD denominated
green bonds. For example, this quarter KfW – already a repeat
green bond issuer - announced it would also participate in the
market on the asset side of the business and invest in a broad
range of green bonds through a EUR 1bn green
bond portfolio. Similarly, IFC, the private sector arm of
the World Bank, supported emerging market issuance by committing
$50m of cornerstone investment to India’s first green bond
from Yes Bank.
Q1 2015 green bonds have been issued by a variety of
types of issuers
The development banks also continued to provide demonstration
issuance and liquidity through benchmark-sized issuance. The World
Bank issued both its largest-ever
green bond of $600m and its longest
dated green bond (40yr) in the same week, yet again proving
its strength as a green bond powerhouse.
The development banks are pushing the envelope on green bond
processes as well; for example, the EIB
launched an upgraded green bond impact report in late March.
Development bank reporting practices, however, are costly. Lower
costs will be needed for the corporate green bond sector to grow,
plus some levels of disclosure are difficult, such as when a bank
is including in it’s green bond pool syndicated loans that are
subject to confidentiality clauses in the syndication contracts.
We believe that clear standards around green assets and around
reporting methodologies, combined with audit-style certification,
can keep the cost of verification suitably low while still
providing confidence in the green credentials of a bond.
Energy and low-carbon buildings account for the largest
share of use of proceeds of Q1 green bonds
To provide an indication of the types of projects to be financed
by the Q1 2015 crop of green bonds we split the proceeds of each
issuance into the declared eligible green project categories and
pooled together. On first glance it shows that renewable energy is
the biggest proportion, with the top three biggest bonds of the
quarter — Terraform Power Operating, World Bank and Vestas — all
Proceeds from Q1 2015 green bond issuance have gone to a
range of project types
Green buildings and water are the second and third biggest
categories, largely through US green munis. Transport appeared
largely because the EXIM of India bond finances rail and bus
transport as well as renewable energy.
Investor interest in green bonds remains high, even as
they become more vocal on expectations of green
It’s no surprise to close followers of the green bond market that
the investor appetite for green bonds has continued in Q1 2015.
This shows through in the upsizing of green bonds as a result of
strong demand –the World Bank’s retail green bond in January, for
example, was upsized
from $15 to $91m; KfW’s kanga green bond intended to be AUD
300m ended up ballooning to AUD 600m; and Yes Bank doubled its
green offering from INR 5bn to INR 10bn ($161.5m).
Another indicator is the continued high levels of
oversubscription. An example from Q1 is the latest Kommunalbanken
Norway’s (KBN) green bond issued in March, which received $700m
orders for a $500m issue. Of course, oversubscription is a
common feature of bond issuances generally in the current market
environment; but green bonds seem to be seeing higher rates of
oversubscription than non-green ones.
A more diverse set of investors are getting involved in the green
bond market. There have been many public commitments over the
quarter to invest in green bonds including €1bn
from Deutsche Bank treasury – in addition to the mentioned
EUR 1bn commitment from KfW. The number of green bond
funds/mandates are also growing: during the first quarter Swedish
insurance company SPP announced a green bond fund following
in the footsteps of Nikko Asset Management, BlackRock, State
Street, Calvert and Shelton Capital Management. Plus Norwegian
investment powerhouse Norges Bank Investment Management (with over
$800bn of assets under management) also disclosed it has
established a green bonds mandate.
Investors are also becoming more involved in structuring green
bond products to fit their specific requirements. For example, the
World Bank issued a green bond with longer tenor of 30year ($34m)
specifically for Zurich Insurance, who wanted to match long-term
liabilities with a green bond. Partnerships such as this will be
important as demonstration issuances to show off green bonds in
Another development is the launch of an investor
statement of expectations for the green bond market from a
group of key green bond investors, brought together by Ceres
Investor Network on Climate Risk. The investors’ main ask is for
greater transparency and reporting, especially quantitative
reporting where possible, on the green credentials and impacts of
green bonds. The report states: “this will minimise ‘greenwash’
concerns and reputation risk to issuers and investors”. The 26
signatory investors are: Addenda Capital, Allianz SE, AXA Group
& AXA IM, BlackRock, Boston Common AM, Breckinridge, CalPERS,
CalSTRS, Colonial First State, Community Capital Management,
Connecticut Retirement Plans, Retirement System of the State of
Rhode Island, Everence, Mirova, NY State Comptroller Thomas P.
DiNapoli, North Carolina Retirement System, Pax World Investments,
PIMCO, RBC Global Asset Management, Standish Mellon Asset
Management, California State Treasurer John Chiang, Trillium Asset
Management, UN Joint Staff Pension Fund, University of California,
Walden Asset Management and Zurich Insurance.
So, interesting start to 2015 — slowish start but the market is
now heating up, and growing both in size and diversity. We expect
strong growth in Q2 and we’re not the only ones expecting 2015 to
be a big year: In Q1 we have seen S&P forecasting $30bn of
corporate issuance alone in 2015; SEB is predicting the total 2015
issuance to reach $70bn and Bloomberg’s Michael Liebreich said in
New York last week they are expecting $80bn. The race is on!
There were $60bn of green bonds outstanding at the end of
——— Tess Olsen-Rong is a
market analyst at the Climate
Bonds Initiative, an "investor-focused" not-for-profit
promoting long-term debt models to fund a rapid, global
transition to a low-carbon economy.