ESG Focus: Green Bonds Crack US$1trn

ESG Focus | Jan 21 2021

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

Despite taking a back seat to social and sustainable bonds in the first-half of 2020, the green bond market roared to life in the second half, cracking the US$1trn mark. Volumes are expected to jump up to 50% in 2021, buoyed by the expansion of "green" criteria to include "transitioning" bonds. And everyone wants a ticket to the ball.

ESG Focus: Green Bonds Crack US$1trn

By Sarah Mills

-Green bonds set to rise as much as 50% in 2021
-"Use-of-proceeds" remains the most common green bond
-Repercussions likely to knock on to equity markets

Buoyed by covid stimulus and ESG safe-haven flows during the pandemic, global green bond issuance hit US$1trn in mid December, according to ING.

The market took a back seat to covid-driven social and sustainable debt in the first half, posting an annual retraction, slipping to about 47% of total global “sustainable” debt financing.

But it’s preparing for a 2021 boom of as much as 50%, say the pundits, thanks in part to the expansion of “green” criteria by the Climate Bonds Initiative in September to include transition projects.

Calvert Research and Management noted that in the first half of 2020, all forms of sustainable funding boomed as governments and corporations directed funds towards pandemic stabilisation with social and sustainable offerings.

The total combined turnover of social, sustainable and green bonds passed US$2trn in the September quarter, according to PV-Magazine Australia.

RBC Capital Markets figures showed social debt more than quintupled in 2020, muscling out green bonds in the first half of the year. Of that, roughly US$75bn debt carrying a specific “pandemic” label was issued in the June half.

But funds returned to the green market in the second half. Strong December-quarter growth followed a record September quarter, taking total cumulative green bond issuance to more than US$1trn.

Calvert believes the market is back on track to post strong growth again in 2021.

“Looking ahead in 2021, many analysts project the strong recovery in green bond issuance to continue — estimates range from $300 billion to nearly $500 billion,” says Calvert in a media release.

This suggests an increase of volume between 30% and 50%. 

Calvert’s Fixed Income Portfolio Manager, Brian S. Ellis predicts the green market will experience strong support from states and countries in the first half of 2021, with the UK, Canada, Spain and up to 11 other sovereign nations slated to issue inaugural green bonds.

As part of its Green Deal, the European Union (EU) alone is set to sell EUR225bn in bonds – roughly 30% of the EUR750bn pandemic rescue package.

Most of the EU pandemic funding is linked to specific green initiatives, and Calvert believes “use-of-proceeds” bonds will continue to dominate.

“Use of proceeds remains the most common form of green bonds issued, comprising 87% of all issuance since first offered by the World Bank in 2008,” says Calvert in a media release.

“In 2020, use-of-proceeds bonds, which finance projects related to energy, transport, building and water, among others, accounted for 84% of total green bond issuance.”

“Use-of-proceeds” requirements are set by the International Capital Market Association and the Loan Market Association. 

Calvert also observed a shift from development bank issuance to corporate issuance, both financial and non-financial, in the 2020 year. Government-backed entities also increased their market share.

It appears corporations are increasingly willing to tap the flush ESG market for funds and increasingly able following last year’s expansion of “green” criteria by the Climate Bonds Initiative to include transitioning projects.

Waste and residential property sectors are set to join banks, property developers, renewable energy providers and state governments for decarbonisation funds, while big polluters are also seeking transition bonds to fund the decarbonisation of their operations.

The Climate Bonds Initiative, in partnership with Credit Suisse, established the difference between “green bonds” and “transition bonds” last September.

Labelled separately, they are both targets for green funding.  Green bonds are typically earmarked for long-term decarbonisation projects within the economy, whereas transition bonds are likely to be issued in conjunction with decarbonising operations.

Lend Lease, for example, recently issue $500m in green bonds to decarbonise urban development projects and Woolworths tapped $400m from institutional investors to decarbonise supermarket sites. 

In contrast, fossil fuel companies might seek a transition bond to accelerate decommissioning of old plants. 

To date, governments such as Germany have been subsidising the closure of coal plants and nuclear operations. 

The net result has been expensive electricity prices. 

It will be interesting to see what the net effect of transition bonds will be upon prices globally and whether this may represent a good time for investors to review investments in heavy-energy-consuming industries.

The prospect of green funds could well set off a wave of corporate activity. 

January has already kicked off with a $2.3bn bid for Bingo Industries by the MIRA consortium of Macquarie Infrastructure and Real Assets. Highly conditional, MIRA appears to be playing its cards close to its chest.

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