TPG INSIGHTS – Green Bonds: A Developing Trend in Worldwide Bond Markets

The Green, Social and Sustainability Bond market has grown tremendously in recent years. Here we discuss the latest trends in Green Bonds, what types of investors typically buy them and what IR professionals should consider before their Company’s issuances of this kind of debt. Green, Social and Sustainability Bonds by definition are defined by how their proceeds are used.

Benefits to issuers raising Green Bonds include:

· Investor diversification
· Communication of the issuer’s sustainability strategy
· Tapping into an oversubscribed demand for this category of debt
· Enhancing internal collaboration amongst businesses

What is a Green Bond/Social Bond?

Green Bond’s use of proceeds is earmarked for environmental- or climate-related projects such as:
· Renewable energy
· Energy efficiency
· Clean transportation
· Pollution control
· Green constructions
· Sustainable water management

Social Bond’s use of proceeds is earmarked for projects with positive social outcomes funding essential services such as:

· Health
· Education
· Financial services
· Affordable housing
· Basic infrastructure
· Transportation
· Clean potable water

Trends
As Green Bond issuances continue to accelerate and demand from institutional investors rises, Corporate issuances will continue to increase while Green Bond guidance around the world begins to emerge regionally in local countries. For example, the People’s Bank of China (PBOC) issued Green Bond guidance for its domestic market in 2015. Issuances immediately began to climb and comprised nearly 27% (equivalent to $27 billion) of total Green Bond issuances in 2016. These Green Bonds denominated in Renminbi (CNY), was remarkable compared to the nearly zero dollars’ worth of CNY issuances in 2015. In 2016, this was driven by financial institutions accounting for 91% of CNY issuances.

The Green Bonds Principles (GBP) The International Capital Market Association is the current Secretariat for the Green Bond Principles (GBP). The GBP’s executive committees holds regular meetings with issuers, underwriters, investors and GBP members to ensure the principles remain dynamic and relevant to the rapidly developing market.

The Green Bond Principles have been translated into many languages, which can be found here: https://www.icmagroup.org/green-social-and-sustainability-bonds/green-bond-principles-gbp/

United Nations Climate Change Conference

The 2019 United Nations Climate Change Conference (UNFCCC COP 25) will be held in Santiago Chile, in December 2019. The conference serves as a formal meeting of member nations to assess progress in dealing with climate change.

Ways in which your Bank or Depositary Bank can help:

Part of your relationship with banks can be boiled down to how relationship managers choose to deliver the firm. For example, if you bank with J.P. Morgan or have relationships there, they can make an introduction to one of the early pioneers and contributors to the Green Bond Principles and someone who happens to be JPM’s banker in charge of Green Bond raises. If your DR Bank happens to be Bank of NY Mellon, their Global IR Advisory(GIRA) team has dedicated Environmental, Social and Governance (ESG) professionals to help you traverse the world of ESG. Additionally, Deutsche Bank and Citi along with JPM were early adopters in the support of guidelines for Green Bonds and can aid in your navigation of these waters. Outside of this interesting rise in millennial-controlled asset allocation, the traditional class of investors including pension funds, insurance companies, high-net worth individuals and family offices are committing allocations to Green Bond issuances. Asset managers have also created Green Bond funds and manage separate green account mandates for Environmental, Social and Governance Portfolios. Bond managers are also committing to investing in Green Bonds.

To learn more about Green Bonds:

  • We suggest: Going to the link in this article and reviewing a copy of the Green Bond Principles, available in multiple languages, including Chinese.
  • Looking through Issuers’ portfolios and reviewing your peers to see if they’re financing green projects. Could you be a pioneer in this area among your peers? Taking note that Green Bonds can also be used to refinance projects.
  • Determining how Green Bonds may fit in an issuer’s ESG strategies. Figuring out how you can report back the impact of the Green Bond project’s expected results.

With this in mind, we believe that you will often find that Green Bonds price in line with traditional debt offerings of an issuer and will often be oversubscribed due to investor demand.

Sources:
1. https://w w w .climatebonds.net/
2. https://w w w .db.com/cr/en/concrete-Deutsche-Bank-supports-guidelines-for-green-bonds.htm