Green bonds are growing by double-digit rates since their inception in 2008 with the World Bank.
HSBC’s recent report, Global Green Bonds, Growth Through Innovation, documents the rise, and Michael Ridley, HSBC Global Green Bonds and European Credit Analyst, sees the trend continuing:
- “Our preliminary estimate for 2017 is for USD90bn to USD120bn of green bond supply.
- We expect substantial Chinese green bond issuance in 2017, though we do not expect the same level of growth as seen between 2015 and 2016.
- The election of Donald Trump may temper the rise of US green bond issuance, but we still expect US municipal green bond issuance to rise.”
And to put this in historical perspective, consider the rapid rise across the last five years:
Annual global green bonds issuance
Although this growth is impressive in percentage terms year over year, green bonds still represent only a tiny fraction (less than 1%) of total annual global bond issuance. So why all the excitement about them as a harbinger of “sustainable finance”? The answer is more in what they could become rather than in what they are now.
Currently, green bonds are much like non-green bonds, except that they are loosely connected to some kind of “environmental” goal that is in need of financing. According to the Climate Bonds Initiative, Green bond issuers vary widely, and include The World Bank, Toyota Financial Services, the Commonwealth of Massachusetts, and the Environmental Defense Fund. Uses of “green bond funds” include projects related to “transport, energy, waste management, and water”, and there is no standard auditing or assurance program to verify the extent of actual environmental progress. Today, the bottom line is that green bonds may or may not have greener outcomes.
What is exciting about green bonds is what they could become, in particular as the stakes and temperatures rise with climate change. Indeed, Mr. Ridley sees the emergence of new types of green bonds that connect finance to actual greener outcomes. “Several highly innovative green bonds have been issued recently,” says Ridley, “including the Bank of China’s ‘green on both sides’ bond – a bond whose proceeds go to improving the environment while the collateral pool consists of Chinese ‘climate aligned’ bonds, and IFC’s ‘green coupon’ forestry bond – though technically not a green bond, this security’s coupon payments are used to finance reforestation in Kenya.”
So these are green bonds with teeth, where performance is more specific and tied to continued financing. What may be next on the horizon is a kind of green bond that is targeted at a specific sector of the economy and designed to achieve a specific environmental outcome in that sector. One of the most promising opportunities for this concept is in the area of climate change.
For example, the most recent data on greenhouse gas emissions from the top 3500 publicly traded companies indicates that emissions are going up when they should have been going down according to IPCC and UNEP guidance. The following graphic illustrates the trend:
Global 3500 GHG emissions
Even more intriguing is that the data shows that the top 100 emitters account for nearly 30% of global annual emissions when you include their value chains. This means that this relatively small number of companies could have an enormous difference on solving climate change. Is it possible that a new kind of green bond could emerge which would incent these emitters to gradually reduce emissions in line with policy guidance?
“It’s possible”, says Mr. Ridley. “There is a growing investor community out there who are seeking actual, measurable improvement in the environmental, social and governance (ESG) performance of the companies in which they invest”. Perhaps this “green bonds creativity” will evolve to help find a bridge between this community seeking positive impact, and the top 100 emitters seeking less expensive capital to fund their transition to lower carbon business models.