Green bonds markets in 2016

Taken from blog,”Brink of economic thoughts”

Green bonds markets in 2016

 

This Short note describes the emergence of a market for green bonds and examines how the market has worked in 2016,also a little focus has been made on the things which are to be looked for in 2017

 

Entities in today’s financial markets raise capital in 2 ways –Stocks and Bonds. Stocks are a kind of ownership while bond is a way of debt financing .It is interesting to make a comparison between both methods of financing as both markets have unique characteristics confined to them. Although when we make a comparison between the sizes of both markets we find that debt market is very large as compared to equity market.

A bond is a form of debt security. A debt security is a legal contract for money owed that can be bought and sold between parties.

Green bond is a debt security that is issued to raise capital specifically to support climate related or environmental projects. This methodology of debt financing is something which is a decade older and a newly conceptualised terminology since 2009 United Nations Climate Change conference held at Copenhegan.The 2009 Summit resulted into a mutual consensus reached among the participating members about how a mechanism has to be evolved to enhance investment in the coming decades to address concerns about the issues of climate change.

In principle it was also concluded that nations especially the developing ones will need a significant assistance to meet the challenges .Copenhagen accord concluded broad commitments about the scale of financial assistance that developed nations will provide to the developing nations. It was indeed essential as it was going to be difficult for the developing nations on their own to finance the technology needed for dealing with the climatic issues.

The Copenhagen Accord envisaged annual financing for developing countries (from both official and private sources) rising to around $100 billion per year by 2020, in support of strong policy actions by  countries to mitigate and adapt to climate change.

 

China was able to issue 255 billion Yuan (US$36.9bn) worth of green bonds in 2016, thus dominating the global market in climate-friendly infrastructure investment. This follows an increasing awareness of environmental issues in China which has been followed through to policy and financial decision-making.

The entire figures of 2016 green bond markets are also an encouraging sign of growth when compared from the previous year’s figures.2016 was also the largest year by far in terms of total growth witnessed, whether in the category of bonds issued, or issuer types, or the ratings or even the use of proceeds .Market has also been highly innovative by showing new types of bonds issued: Green covered bonds (which has a dual recourse structure), the first green residential mortgage-backed security (RMBS) from Obvion and the first Green Schuldschein (Nordex).

 

As cities are  looking forward  to play a role in country NDCs, Green bonds have attained a significant place amidst an increasingly viable form of finance with issuance from cities and municipalities growing from just USD4bn in 2014 (10%) to USD10.5bn (13%) in 2016. Whereas  US municipalities continue to dominate the sub-sovereign space, green municipal and city bonds have come from all around the world, including Mexico{Latin American states, Sweden and Australia. Nordic municipality debt aggregators were important players, enabling small municipalities’ access to low-cost capital through the bond market despite their small size.

 

For the year2016, green bonds use of proceeds was more equally split between the 7 sectors, showing the process of maturing of the markets. The largest category remained Energy (a total of USD31bn investment in 2016), although its share got declined from 52% in 2015 to 38% in 2016. Conversely, investment in Water grew from 9% to 14%. Both Transport and Buildings & Industry increased their share by 2%.

 

 

This can be considered as a welcome indication that the green transition is taking place all across the sectors.

Poland issued its debut green sovereign bond of EUR750m in December 2016 .France has already issued an impressive EUR7bn green sovereign bond in January 2017 .There are also plans for green sovereign bonds from Morocco and Nigeria. As governments seek to implement Nationally Determined Contributions (NDCs), sovereign green bonds are a logical financing option.

We have seen new players coming to the market from Poland, Costa Rica (Banco Nacional de Costa Rica), Philippines (AP Renewable), Morocco (MASEN, BMCE Bank), Colombia (Bancolombia), Latvia (Latvenergo), Brazil (Suzano), Mexico (Mexico City Airport Trust, Mexico City, Nacional Financiera), India (Axis Bank, Greenko, Hero Future Energy, NTPC, PNB Housing Finance, Renew Power) and of course, China.

In our neighbour China has shown remarkable increase since 2015 when clean energy company Goldwind released the country’s first green bond in July 2015.

China Central Depository and Clearing Company {CCDC}, which is a state, owned financial institution has come up with figures which do show a top level of sustainable financial push.

China as an economy grew very fast over last few decades. Its growth story enabled it to also amass one of the largest foreign exchange reserves on the planet .But the growth narrative also had one another side to witness. After Decade wise back to back rapid coal –fuelled development, China is facing issues such as food insecurity.

 

Setting up of international parameters has been under constant development since inception of the term “green bond “since 2007.But in a way it has assured the investors that the money which is being invested in the projects is going for an environmentally beneficial purpose and assures positive return also.

 

As one of the significant contributors to the UN climate deal, Beijing has committed itself to reduce carbon intensity (greenhouse gas emissions for each unit of GDP growth) 60-65% by 2030 from 2005 levels.

The People’s Bank of China, the central bank of China has estimated that between 2 and 4 trillion Yuan ($320-640bn) of investment is needed annually to clean up the economy.

Chief economist of People Bank Of China,Ma Jun said: “This report shows that the green bond market has had a strong start in China, now the world’s largest green bond market. Green bonds already make up 2% of Chinese bonds; whereas globally the figure is less than 0.2%.But the potential is tenfold, because 20% of investments in China need to be green to meet our national objectives. So we expect the green bond market to continue to have very strong growth.”

Many prominent economists have expressed their belief that development of green bond markets could help in mobilisation of private funds into green projects, thus helping in dealing with climate challenges and environmental issues.

Last year in July 2016, New Development Bank had successfully reported about the issuance of bank’s first green financial bond with a total size of worth RMB 3 billion. The bank had thus become the first international financial institution which issued a green financial bond in Chinese onshore bond market.

Overall climate issues made the concern in 2016 and the situation remains very grim. But on the front of green bonds and climate affairs, it can be summarised that green bond market remain very progressive and fluent in 2016.

The year 2017 may witness many more issuers from lower rating band coming to the markets as government are trying to mobilise more liquidity and support in the market and we are witnessing over subscription in the markets.

 

 

 

Harsh Vardhan Pathak

References; Various online sources. Climate change issues related websites. Bloomberg.

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