The growing green bond market needs to clarify what constitutes as ‘green’ as there is still confusion among investors and those operating in the market about what green bonds are, according to an analyst.
Speaking to the Financial Times, Bob Bahr, an analyst with Société Générale, said, “While most investors like the idea of green bonds there is still considerable confusion about what green bonds actually are, and what they are for.
“We expect it will be some time for the various parties involved – issuers, investors, and intermediaries of various sorts, including banks and non-governmental organisation – to achieve some sort of consensus on the issues, but the process has clearly begun.”
Green bonds are designed to fund environmentally friendly and sustainable projects, such as renewable energy projects. Bonds pay investors back over a defined period of time, with regular interest payments.
Last month a coalition of campaigners called for further clarification in the Green Bond Principles, to ensure they include “genuine commitments”. The principles were unveiled in January and are signed by 13 investment banks. The principles serve as voluntary guidelines on the recommended process for the development of green bonds.
French power company GDF Sues successfully issued the largest-ever corporate green bon at €2.5 billion (£2 billion) last month. The company’s offering was three times oversubscribed, highlighting how fast the market is growing and the demand for green bonds. As a result, clarification is becoming increasingly important.
Due to the increasing number of ‘mega deals’, ratings agency Standard & Poor’s (S&P) estimated that the corporate green bond market will double over the course of 2014, reaching $20 billion (£17 billion). Currently, corporate green bonds make up around 30% of the green bond market but are dwarfed by mainstream corporate bond issuance.
S&P explained that green bonds are attractive to investors because risk remains in the issuer’s balance sheet.
Investment bank HSBC also predicted growth in the green bond market, predicting that globally issuance will reach $25 billion (£15bn) this year. It attributed the rise to the capital needs of issuers as well as the commitment of institutional investors to climate finance and responsible investment.
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