Ratings agency Standard & Poor’s (S&P) has estimated that over 2014 the issuance of corporate green bonds will double, reaching $20 billion (£12bn), pointing to ‘mega deals’ as demonstrating the growing importance of green bonds as a source of capital.
Currently, corporate green bonds make up around 30% of the green bond market and are dwarfed by the size of mainstream corporate bond issuance. In 2013, corporate green bonds reached $10.4 billion (£6.1bn).
In a report, S&P predicts this will almost double to $20 billion (£17bn) this year, driven by the needs of corporates, as well as the desire by investors to allocate capital to socially responsible and environmentally sustainable investments.
A bond is essentially an IOU, where investors loan money to a company, the government or another organisation. The money is paid back in full over a set period of time with regular interest payments. Green bonds fund environmentally friendly and sustainable projects, such as renewable energy developments and climate change adaption projects.
S&P explains, “Crucially for investors, the credit risk of a corporate green bond remains in the issuer’s balance sheet.
“This means that, unlike with multilateral bank insurance, investors do not have to sacrifice yield to gain green exposure, nor significantly increase their risk profile in order to invest in assets that aid environmental efforts. This can satisfy investors’ requirements for yield, while safeguarding their reputation for socially responsible investing.”
The report points to a number of new ‘mega deals’ to highlight how the sector is growing. This month, French power company GDF Suez successfully issued the largest-ever corporate green bond at €2.5 billion (£2bn). The company’s offering was three times oversubscribed, evidence of the continuing strong demand for corporate green bonds, with almost two-thirds of allocations coming from investors managing socially responsible investment funds.
Looking to the future, S&P said, “As the market continues to develop, smaller environmental projects may be able to attract financing by aggregating into larger investment offerings. This could make them more suitable to larger investors.
“We think it likely that the market will begin to see structuring of bonds to enhance credit support. We have already seen evidence of this from Toyota; it used securitisation of car loans to collateralise its corporate green bonds, which were quickly oversubscribed.”
Earlier this year, investment bank HSBC predicted that green bond issuance would more than double in 2014, reaching a global record of $25 billion (£15bn). The pace of growth would be driven by capital needs of issuers and the commitment of institutional investors to invest responsibly, the bank said.
In January, the Green Bond Principles, which are signed by 13 investment banks, were unveiled with the aim of encouraging transparency and disclosure within the market. However, a coalition of campaigners has called for further clarification of the principles to ensure they include “genuine commitments”.
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