- We believe corporations could issue up to $28 billion in green bonds this year, a large increase on 2015 volumes.
- Forces driving rapid market growth include new issuances by highprofile corporations, a burgeoning Chinese market, emerging interest from U.S. utilities, strong investor demand, and increasing environmental disclosure requirements.
- We see signs that metrics to evaluate the level of disclosure and environmental credentials of green bonds are becoming more important to investors.
- Market pricing of green bonds is evolving and we believe a bond’s environmental credentials could contribute to pricing over the long term.
LONDON (Standard & Poor’s) April 15, 2016–Corporates could issue up to $28 billion in green bonds worldwide this year, estimates Standard & Poor’s Ratings Service in a report published today: “The Corporate Green Bond Market Fizzes As The Global Economy Decarbonizes”).
If issuance continues at the rate seen in Q1 2016, corporate green bond issuance would be about $15 billion, which would already mark a large rise from $9.6 billion issued in 2015. However, if the Chinese corporate green bond market takes off this year, as some market observers predict, this could add around another $13 billion to corporate bond issuance in 2016, by our reckoning, bringing total corporate green issuance to $28 billion. This is nevertheless subject to the release of the Chinese corporate green bond guidelines, expected this quarter.
“We think our estimates for market growth will prove robust given the trend for larger green bond issuances, led by Apple’s $1.5 billion issue in February,” said Standard & Poor’s credit analyst Michael Wilkins. “The types of projects being financed by green bonds are also widening, with growth into water and transport.”
Emerging issuance by U.S. utilities could further boost the green bond market. We also expect that increasing reporting requirements on corporations, either mandated or optional, to disclose environmental data in their annual reports, will fuel further issuance.
Investor demand for corporate green bonds, which companies issue specifically to fund environmental projects, will continue to outstrip supply this year following investor commitments at the Paris climate change negotiations (COP21) in December 2015.
Other signals that the corporate green bond market is rapidly evolving include increasing interest from investors in metrics to evaluate the level of disclosure and environmental credentials of green bonds.
“Market pricing of green bonds is still developing but, in the longer term, we believe bonds’ environmental credentials could contribute to their pricing,” said Mr. Wilkins.
We expect this reflection of a bond’s green credentials in its pricing will come initially in the secondary market. In the primary market, syndication desks will likely push for similar spreads to conventional bonds as the market develops so as to maintain interest from as large a pool of investors as possible. In the secondary market, no such pressure exists, so increased disclosure of the green credentials of a bond could drive demand and influence pricing in the same way as other factors, such as credit quality, yield, duration, and demand.
Corporate green bonds are issued by companies (as opposed to governments, municipalities, and development finance institutions), which use the proceeds raised by the bond to finance specific environmentally-focused activities or programs. Their coupons are repaid from the issuer’s general balance sheet which alleviates any project specific risk and the bond is typically assigned the companies’ credit rating.
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