Green bond issuance surges in 2020

A late-2020 surge in underwriting was only the start of a coming wave of financial market activity in green bonds, asset managers, risk analysts and sustainability specialists all told Argus.

After a deep trough in activity in early 2020, green bond issuance in September spiked to $62bn and maintained strong volume through the end of last year, so that total green bond issuance ended 2020 13pc higher than 2019. The $305.3bn in green bonds issued in 2020 drove total issuance of green bonds since 2007 through the cumulative $1 trillion level, data from Bloomberg BNEF showed.

Accounting for green bonds as a separate class from sustainable bonds, climate-specific bonds or other broad environmental, social and governance investment products remains challenging, and different totals will come from different methods, a panel at the Reuters NEXT conference noted on 11 January. The BNEF numbers rely on use-of-proceeds definitions from the International Capital Markets Association and the Loan Markets Association.

Standards for green bonds are cohering among private firms, industry bodies and international organizations. The impending merger of the Sustainability Accounting Standards Board and the International Integrated Reporting Council, announced in November 2020, is aimed at simplifying the evaluation of green bonds and other sustainable investing products. At the same time, former Bank of England governor Mark Carney is leading an international effort to create standards that can underpin trading of greenhouse gas emissions and related financial products ahead of the COP26 climate conference planned for November.

As those definitions are standardized, growth in the issuance of green and transition economy bonds will be "huge," according to Climate Bonds Initiative chief executive Sean Kidney.

Independent review practices developed in order to price early World Bank green bond issuance have already spread so that 80-90pc of green bonds are now independently reviewed, Kidney said at the NEXT conference, allowing issuance to grow even as broader industry standards remain unsettled.

The market for green bonds could encompass a significant part of the estimated $1 trillion/yr required in capital to fund renewable and clean energy sources if current 2050 emissions goals hold, head of Commodity Research Nick Stansbury at asset manager Legal & General Investment Management said. The more clear pricing on carbon becomes, the more companies can "start getting capital markets moving properly," Stansbury said at the NEXT conference.

While the appetite for green bonds is significant and growing among buyers of risk, the absence of a large secondary or tertiary trading market remains a headwind for financial market participants, Katherine Spector of ProSpector Energy Advisors told Argus.

Holders of green bonds need pricing from those markets to benchmark and model their own performance, she noted, and, in the absence of a widely accepted carbon price, building that more liquid green bond market remains challenging.

"An active and liquid secondary market would then support exchange traded funds and other investment products available to a larger class of investors," Spector said. "That creates a feedback loop, prompting more demand in the primary market."

The prospects for a national US carbon price, much less a single global price, remain elusive. But regulators at federal and state agencies have begun to issue guidance that proposes pricing approaches and market participants told Argus they are looking at ways to use those models in internal pricing that could enable expanded green bond transactions and issuance.

Additionally, the start president-elect Joe Biden's administration could quickly trigger a flow of new transaction data that could underpin growing issuance of green bonds. As much as $40bn in existing loan authorizations has been held at the Department of Energy for renewable and low-carbon energy projects, and bankers involved in those projects say they expect release of that federal funding within days of the new administration beginning. The Biden administration has committed to a much larger cross-government approach to clean energy infrastructure backed by significant new spending, but the fate and timing of those broader plans remains unclear for now.

By Peter Gardett