Green Bonds 104: Who Buys and Issues these Green Bonds?

7 min readJun 29, 2017

This is part 4 of a 6-part series on Green Bonds. This series was inspired by numerous conversations which prompted me to create an online compendium on Green Bonds. With the Kenya Bankers Association and other key market stakeholders creating a pipeline for the first green bond in Kenya, it is important to be informed on what green bonds are and their potential role in Kenya’s sustainable development.

From previous posts, we have come know what green bonds are, revised their history and why they are important financing instruments. But equally important is whether the market conditions are conducive for trading the bonds as well as the market participants, who will be the main focus of this post.

It is quite clear that 2016 was a phenemonal year in the climate finance space as the number of green bond issues doubled the 2015 figures (see Figure 1). In addition, the green bond market bloomed with the increased number of market participants, issuer types, ratings and use of proceeds as well as market innovations¹ . Let us briefly examine the different types of bonds that have so far made it to market.

Figure 1: Green Bond Market 2012–2016 via Climate Bonds Initiative

Green bonds are normally segmented according to the needs of different classes of investors and issuing entities:

Corporate bonds are use of proceeds bonds issued by corporate entities with recourse to the issuers in the event of defaults on interest payments or on return on principal. In 2013, Bank of America Corporation (one of the co-authors of the GBP) issued a benchmark-sized corporate green bond with a $500 million offering.
An asset-backed security (ABS) is created when a porfolio of cash-flows from green projects are securitised into a single bond. A green example is the Toyota ABS that is backed by energy efficiency loans.
Residential Mortgage Backed Securities (RMBS) are sub-sets of ABS but target the residential property market. In this context, green RMBS are bonds are backed by green mortgage loans and proceeds of the issuance will in turn fund green mortgages like in the case of Dutch-based Obvion that was verified by Sustainalytics.
Supranational, sub-sovereign and agency bonds (SSA) are mostly issued by international financial institutions such as the World Bank and European Investment Bank. They largely resemble corporate bonds relating to “use of proceeds” and recourse to issuers. The African Development Bank has been quite active in this space and has not only been able to attract central banks and official institutions but also SRI investors. Usually, the money is chanelled through a separate company or special purpose vehicle (SPV) for a single or multiple projects.
Regional or Sub-sovereign bonds normally issued by local authorities particularly municipalities and cities. Pioneer issuers of these bonds include the USA in the large number of issues,closely followed by Europe and interesting the City of Johannesburg has also issued one. Sovereign bonds have gained popularity over the last several months. Though Poland issued the first ever green sovereign green bond, France currently holds the record for largest and longest maturity when it issued its sovereign green benchmark bond of EUR 7 Billion in January 2017 with yield of 1.75% and expected maturity date of 25 June 2039 .
Financial sector bonds are issued are normally issued by a financial institution to specifically finance “on- balance sheet” lending.
Covered bonds are highly-regulated with good credit ratinds and lower funding costs with a dual recourse structures i.e. bond investors have claim over dedicated ‘cover’ pool of assets as well as claim over the issuer. So far banks are the sole issuers of covered bonds. German real estate and mortgage bank, BerlinHyp issued its first Green Pfandbrief (a form of German covered bond) worth EUR 500m with a coupon of 0.125% and triple-A rating in 2016. To cap it all , it was 4x oversubscribed².

Also see Credit Co-operative Caja Rural de Navarra’s covered bond and sustainability framework.

Schuldschein are promissory notes similar to bonds but are less expensive and do not need to be listed on a securities exchange. These debt instruments hail from the Germanic markets have a horizon of 2–5 years and are mainly tailored for borrowers who can not access the bond market. German wind company, Nordex issued its first green schuldschein of EUR 550m in 2016 that was split into 4 tranches ranging from 3–10 year tenors with fixed or variable coupons of between 1.5–3.0%.
Sukuk are Shar’iah -compliant bonds that are backed by specific assets as they address the Shar’iah concern for the environment. Hence returns are generated by the linked assets or are created through the proceeds of the sukuk. Nonetheless, this niche market is challenged by investor awareness and confidence, small secondary markets and high risk profile of the projects that use new technology³⁴.

http://bit.ly/2o2nBUa

From Figure 2 below, most of the bond issues have largely been in developed countries; emerging economies in Latin America and Asia are becoming particularly active with countries like China, India, Brazil and Mexico leading the way. China has come to recognise that sustainable economic growth and development can not be achieved at the detriment of the environment as evidenced by the smog in Beijing. With increased awareness, China has been increased the amount of green debt and been active in green policy making.

Figure 2: Green Bond Issuance by Region via Climate Bonds Initiative

It has been noted that although there’s strong investor demand, it may not necessarily be homogenous. The market for different green bond takers will vary due to the following characteristics: credit quality, liquidity, size, terms, use of proceeds and labelling. It has been reported by Climate Bonds Initiative (CBI) that the majority of green bond investors tend to be institutional investors and insurance companies in Europe, followed by Japan and the Americas largely due to their potential low cost and long term source of capital. They address their needs in terms of asset-liability matching while providing an avenue for portfolio diversification with the possibility of attractive yields coupled with relatively stable and predictable sources of income.

A number of “mainstream” asset managers and consults are embedding ESG values in their portfolios or constantly advising (high net-worth) clients with strong appetite for climate or green related investments. Hence, as a show of transparency and commmitment, they may venture into green investments. Socially Responsible Investment (SRI) asset managers and faith-based investors are more interested in the actual “use of proceeds” as opposed to the labelling of the bonds due to their strong ESG financing criteria. It is likely that they will go for smaller deals than other investors as they tend to be smaller players in the market. Though they are open to both taxable and tax-exempt bonds, they more likely to seek shorter horizons with higher credit ratings. Faith-based investors nonetheless are more particularly more interested in liquidity⁶.

Platforms such as DivestInvest Philanthropy have been active in the clean energy space but now other foundations across the spectrum are recognising the importance of investment in green investments. By and large, most foundations still require financial returns but some foundations are willing to concede some profit share if there’s evidence-based environmental impact⁷.

The launch of the Green Bond Principles by major banks in 2014 has been instrumental in enhancing green bond market standardisation. Banks are keen on tapping into debt markets through issuance but also they seek income by offering underwriting services⁸.

Global momentum is building in favour of fossil fuel divestment⁵ and the increased awareness on the need for clean and efficient energy. In a 2016 report, Arabella Advisors noted that investors controlling USD 5 trillion have committed to dropping some or all of their fossil fuel stocks from their portfolios. The report further quoted that 688 institutions (including faith-based organisations, foundations and universities) and 58,399 individuals across 76 countries had committed to divesting in fossil fuels; with 55% based outside of the United States this presents a prime market for green investments including green bonds. Though the African carbon footprint is not as large as other developing and emerging countries, the above cited examples should propel market players to lessons on how they can tap into various sources of green debt financing that will be well-suited for their national sustainable growth and development.

NEXT: Green Bonds 105: Can Brown and Green Mix?

References