• DB’s credit research analyst Craig Nicol shares insights on the $250bn green bond market.
• In the absence of an official definition Nicol describes a green bond as: any bond whereby use of proceeds has a positive environmental or climate-change impact.
• Issuer is in charge of labelling a bond as green and then aligning with the required standards. A third party will usually back up this claim. The EU Taxonomy will hopefully develop this further and set out stringent and consistent framework.
• In Europe green bonds have been issued to fund renewable energy, for pollution prevention, to improve energy efficiency in corporate buildings, fund hybrids and EVs.
• “Greenium”, or a premium for green bonds versus a similar vanilla issue. Nicol finds that premiums are small where they exists at all.
• Green bond market is become more balanced in terms of issuers. In 2013-14 corporate and financials accounted for just 20% of issuance with quasi-sovereigns and mortgage-backed issuers dominating. Now corporates and financials account for around 50%.
• But there is a lack of diversification with a few large green issuers skewing aggregates / adding concentration risk. Bank and utility companies make up two-thirds of all issuance.
• Number of corporate issuers is close to 170. This has more than doubled in three years and comes from zero ten years ago.
• Expectations for 2020 issuance is a for similar growth rate, taking issuance to $350-400bn.
Why does this matter? Continued rapid growth of the green bond market will make the lack of a standard definition increasingly problematic and greenwashing could become more prevalent. Increased expectations of green QE from the ECB could well make the problem worse as the currently small pool of investable assets would struggle to meet demand.
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