Corporate Green Bond Market Set To Double To $20 Billion In 2014, Says Report

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business-news_01_temp-1386056223-529d8a1f-620x348Green bonds, which raise funding for environmentally beneficial investments, are set to grow dramatically, driven by the financing needs of issuers and by investors increasingly allocating capital to socially responsible and environmentally sustainable investments, according to a report published today by Standard & Poor’s Ratings Services.

The key findings of the report “The Greening Of The Corporate Bond Market” are:

  • The corporate green bond market, currently at $10.4 billion, is gathering convincing impetus and we estimate that, based on year-on-year growth trends, it will grow to around $20 billion globally, double the size of the total green market in 2013.
  • In our view, corporate green bond issuance is accelerating, not only because this aids diversification of investor pools for issuers, but also because of investors’ growing interest in implementing environmental, social, and governance goals.
  • So far, corporate green bonds have mostly been issued in Europe, with investment-grade ratings generally of ‘A+’ or ‘A’.

According to Standard & Poor’s credit analyst Michael Wilkins, author of the report: “As the market continues to develop, smaller environmental projects may be able to attract financing by combining into larger investment offerings that could make them more suitable to larger investors. We think it likely that the next stage of market evolution will see structuring of bonds to enhance credit support and a move to finance environmental projects away from the issuer’s balance sheet.”

Standard & Poor’s estimates that the corporate green bond market in 2014 will be double the size of last year’s total green bond issuance. Last week saw the largest-ever green bond, issued by French power company GDF Suez. At €2.5 billion (US$3.4 billion), GDF Suez’s bond represents close to a third of the total €7.6 billion ($10.4 billion) of corporate green issuance since November 2013. It is almost double the previous record of €1.4 billion ($1.9 billion) set by another French power company, Electricite de France.

We believe issuance of green bonds by private sector companies will accelerate because they aid diversification of investor pools and because investors are increasingly implementing environmental, social, and governance (ESG) targets initiated by the United Nations Principles for Responsible Investment (PRI). As of April 2013, 1,188 investors globally had signed up for the PRI, representing approximately $34.0 trillion of assets under management (AUM), which was over 2.5 times the amount five years previously.

A key distinction of green bonds from mainstream corporate issuance is that proceeds are ring-fenced and allotted to finance or refinance projects addressing environmental issues. Crucially for investors, the credit risk of a corporate green bond remains on the issuer’s balance sheet. This means that, unlike with multilateral bank issuance, investors do not have to sacrifice yield to gain green exposure, nor significantly increase their risk profile in order to invest in assets that aid environmental efforts.

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