The days of green bonds being stuck in a niche corner of financial markets look numbered. A powerful tailwind beckons as big global banks focus on the fast-growing sector.
Banks are increasingly selling green bonds of their own, bringing a further stamp of legitimacy to the fledgling market, while also bulking up their role as underwriters in helping other borrowers market their debt to investors.
“We expect to see a market that is developing pretty much globally,” says Jean-Marc Mercier, global co-head of debt capital markets at HSBC. “The banks have been doing a lot of firsts . . . there are more green assets in their portfolio.”
Last week, Barclays sold the first green bond from a UK financial institution linked to assets within the country. The €500m deal, which attracted almost €2bn of orders, followed other inaugural deals for banks in the burgeoning market for green financing.
With total green bond issuance so far this year running above $100bn globally — already ahead of the $79.7bn raised for all of 2016, according to Dealogic data — a major question that animates the market is how to clarify the relationship between the proceeds of the debt and the green assets being referenced.
Green bonds are designed so that the proceeds of the debt are spent on projects, activities or assets that have an environmental purpose, which can be very broadly defined. Banks have typically complied with green bond principles set by the International Capital Market Association, a trade body, although they have also established their own green frameworks.
The Barclays bond was issued to refinance mortgages for homes that have a low-carbon intensity — a measure of emissions — according to publicly available data. The bank received a second-party opinion from the Carbon Trust, which confirmed that the Barclays framework complied with the ICMA principles.
Such measures serve to reassure investors that the bonds are being used for green purposes, and to eliminate the risk of so-called “greenwashing”.The bank also confirmed that the assets in question would “not be used by Barclays as collateral in any other deal”.
“There are a lot of questions in the green bond space regarding labelling,” says Billy Suid, a managing director from Barclays Treasury.
The increased role of banks as borrowers in the market is an important step in the evolution of the asset class. Of last month’s benchmark issuance in euros and dollars, almost half came from financials, according to ABN Amro.
“The market is growing . . . from a reputational perspective, you can show you are a bank that’s involved in green,” says Joost Beaumont, an analyst at ABN Amro. “If you are involved, you probably also get involved in new deals so it helps the business of the bank as well.”
A new “market-led initiative” in Brussels to define and introduce “energy efficient” mortgages could further boost green bond issuance by banks, by providing them with a larger pool of green assets to fund.
The initiative “aims to demonstrate that energy efficiency has risk-mitigation effects for banks because of its impact in enhancing a borrower’s ability to service their loan and on the value of the property/collateral which could, therefore, qualify for a better capital treatment”, the organisation said this July.
Covered bonds — a type of low-risk bank debt that is directly and legally linked to a pool of assets — are usually issued to fund mortgages across the continent. This month, Deutsche Hypotheken Bank is expected to become the second German lender to launch a green covered bond, and will use the proceeds to finance green buildings.
In Europe there is not a taxonomy of what exactly is green. You still have some grey areas, you have the risk of greenwashing
Mr Beaumont points out that for green unsecured bonds, a larger and more dedicated investor base provides access to sources of cheaper funding.
“Covered bonds are so expensive already, so the benefit of issuing a green covered bond is more limited than when you use green assets to issue non-secured,” he says.
Beyond incremental funding benefits, banks stand to benefit more broadly from the market’s evolution. Their own frameworks for issuance could represent influential blueprints for other issuers, especially given their role in originating deals for companies and governments.
And in the investor community there is strong demand for clearer definitions surrounding the asset class.
“In Europe there is not a taxonomy of what exactly is green,” says Mr Beaumont. “You still have some grey areas, you have the risk of greenwashing.”
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