Investors are lining up to invest the green stuff in ‘green’ bonds, but is the boom in environmentally friendly investment sustainable?
All of a sudden in the world of private investment, green is good. The past 12 months have seen a number of global companies issue green investment bonds to finance their environmentally friendly projects - and they have had no trouble attracting investors.
Standard & Poor's (S&P) estimated that as of May this year, the corporate green bond market was worth $10.4bn. The ratings agency predicted that this value would almost double by the end of 2014. Investment bank HSBC made a similar prediction at the beginning of this year.
This growth owes much to a number of high-profile green bond issues. In May, a green bond worth €2.5bn issued by electric utility company GDF Suez was three times oversubscribed. More recently, Lloyds Bank's green bond, which will be used to support small-scale renewable energy projects and healthcare providers based in the UK, raised more than £250m.
"The boom in green bonds owes much to global targets relating to environmental, social and governance"
The bank's bond follows the issue in March by Unilever of a green sustainability bond, which is both the first in the sterling market and in the fast-moving consumer goods sector. Proceeds from the £250m bond will go to a number of projects including the 'Lean & Green Freezer' scheme across Turkey, Russia and the US. The freezers use compressors, fans and hydrocarbon refrigerants that together make them 30% more energy efficient than older models.
In the same month, Toyota Financial Services issued what it claims is the first green bond in the auto finance industry. Money raised will be used exclusively to fund consumer loans and leases for green vehicles including hybrids such as the Toyota Prius.
Green investment in numbers
Estimated value of the corporate green bond market as of May this year
Amount raised by the World Bank since 2008 to support green projects
Amount Unilever's green bond issue raised in March this year
Number of projects the UK's Green Investment Bank has earmarked funds for in 2013-14
Number of green banks the US expects to have by early 2015
Number of times GDF Suez's green bond worth €2.5bn was oversubscribed
The surge in this type of investment began last November when Vasakronan, a leading property company in Sweden, issued the world's first green corporate bond, developed in partnership with the World Bank.
To date, the majority of corporate green bonds have been issued by utilities companies, which represent two-thirds of the market's value. Most of the bonds have been issued in Europe, although the rest of the world is starting to follow suit. In August, Taiwanese company Advanced Semiconductor Engineering sold Asia's first labelled corporate green bond.
Entry into the expanding green bond market is enabling corporates to tap an additional pool of investors that are committed to principles of socially responsible investing, according to S&P.
The agency says the boom in corporates issuing green bonds - and the desire to invest in them - owes much to global targets relating to environmental, social and governance (ESG).
"In our view, corporate issuance is likely to accelerate not only because this aids diversification of investor pools, but because of investors' growing intention to implement ESG targets initiated by the United Nations Principles for Responsible Investment (PRI)."
This view is supported by financial services giant Morgan Stanley, whose research arm launched a Sustainable + Responsible team last year. The team works with equity analysts to generate sustainability-related investment ideas and advice for institutional investors, and recently released a report on investing in global sustainability
Jessica Alsford, Executive Director, Morgan Stanley Research, says there are now about $45tn of assets under management that are either owned or managed by signatories to the PRI.
"This is certainly increasing the integration of sustainability into the investment process," says Alsford. "Second, I think that there are material issues that are going to have an impact on economic growth and on the demand for different products and services. Whether investors define themselves as socially responsible investors or not, these are mega-trends that make sense to incorporate into any investment analysis."
Here to stay?
The PRI has encouraged about 30 stock exchanges to enhance ESG disclosures among their listed companies, but is this growing commitment to green bonds here to stay, or is it just a fad that will come and go like many others in the investment sector?
From an holistic viewpoint, a bond in which all funds flow into environmental-related investments is difficult to argue against. Yet the business case is not so immediately compelling. To many in the securities and investment sector, limits on the use of proceeds, additional monitoring and reporting expenses - with no immediate financial benefits over and above an ordinary corporate bond - appear out of place in the profit-driven capital markets.
On close inspection, however, green bonds hold considerable appeal to investors. Although environment-related projects tend to have high upfront capital expenditure, they typically also have low maintenance costs, and, if backed by government subsidies, relatively stable revenue streams.
Just as crucially for investors, the credit risk of a corporate green bond remains on the issuer's balance sheet. This means that, unlike with multilateral bank issuance, 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.
"Our role goes well beyond that of a traditional investor"
Investors in green bonds want assurance, though, that the proceeds are being used to deliver environmentally sustainable outcomes. With this in mind, Unilever has developed a Green Sustainability Bond framework. The framework includes a set of clearly defined criteria on greenhouse gas emissions, water use and waste disposal for projects selected, and outlines a yearly reporting structure to provide full traceability of the funds.
Governments go green
Whereas corporate green bonds are a relatively new investment initiative, green investment has been a fixture in the more altruistic world of multilaterals and development banks for a number of years now.
Since 2008, the World Bank has raised $6.4bn through 67 transactions and 17 currencies to support global projects that seek to mitigate climate change or help affected people adapt to it. One recipient of World Bank Green Bonds is Indonesia's Geothermal Energy project, as the country needs to increase power generation from renewable geothermal resources and reduce emissions of carbon dioxide.
More recently, national governments have been following the World Bank's lead by launching their own green banks. Rather than providing grants to stimulate clean energy investment, these banks use attractive interest rates and other incentives such as loan-loss reserves to leverage money from the private sector.
In the UK, the Government created the Green Investment Bank (GIB) in 2012 to jump start investments in cleaner, greener technology.
"Our role goes well beyond that of a traditional investor," says Shaun Kingsbury, Chief Executive of the GIB, which is headquartered in Edinburgh. "We are providing a positive demonstration by successfully committing capital to profitable, green infrastructure investments."
The GIB has just invested £64m into a new energy-from-waste plant in Derby - the first project of its type in the UK to be funded by long-term project finance. GIB also intends to raise a £1bn fund to encourage new private investors to invest in offshore wind farms nationwide.
To date, GIB has earmarked £668m to 18 new green projects in 2013-14, while an additional £1.9bn of private money has been committed to these projects. The bank, which has co-invested with more than 70 domestic and international private investors to get the projects off the ground, claims that every investment is on track to make a profit.
"We are making a difference across the UK by taking on the tough projects, de-risking new technologies and lowering the cost of capital for our sectors," adds Kingsbury.
Across the pond, the US Government is on a drive to establish green banks that use a small amount of public capital to generate significant private investment in clean energy.
In 2012, the country's first green bank opened for business in Connecticut. According to the bank, known as the Clean Energy Finance and Investment Authority, for every one dollar of ratepayer funds invested in the bank's green projects in 2012-13, roughly $10 was invested by private sources. Connecticut's Property Assessed Clean Energy programme accounts for much of this investment. The programme lets commercial customers finance clean-energy upgrades to their buildings through their property tax bill without having to put any money down.
Connecticut's big neighbour, New York, launched its first green bank in 2013, and Hawaii has announced plans to set up a $150m green bank later this year. California, meanwhile, recently introduced a Senate bill that lays the groundwork for a green bank in early 2015.
From London to Los Angeles, it seems that the boom in green investment, both from the public and private sectors, looks set to continue for quite some time to come.