Debt Capital Markets – What is a Green Bond?
Green bonds are debt securities that use the proceeds to fund sustainable and environmental-friendly projects.
Given today’s investor focus on environmental, social and governance (ESG) factors – whether for political reasons or other ethical considerations, green bonds can be very attractive bond issuances for potential investors. There may also be tax benefits to issuing in this manner, whether at the issuer level or at the investor level.
In addition to this, there may be capital pools where certain funds (mutual funds, pension funds, government agencies) are mandated to invest only in green bonds or as a certain % in green bonds. Bond issuers and their treasury teams will accordingly look at green bonds as a way to tap into a large investor base.
Green bonds may have a lower coupon than normal issuances owing to the aforementioned benefits (broader market participant pool leading to more demand, targeted investor pool with limited supply, tax benefits) but mutual funds or ETFs that sell “green” to the retail or smaller institutional investor may actually come with higher management fees.
Sample Green Bond Issuance
There is not much fanfare beyond possibly a Bloomberg article about the issuance of a green bond to fund a LEED Gold or Silver building – they are more or less standard bond issuances except the debt capital markets arm of the investment bank will market to a different set of investors. The process is very standard other than a larger public relations push.
If Salesforce decided to build a state of the art, environmentally friendly building and funded it with Green Bonds, you would still look at the usual bond characteristics such as:
- Size: US$800 million
- Maturity: January 31, 2029
- Benchmark: Whatever the on the run 10-year US treasury bond is (UST)
- Spread: +151 bps to the benchmark
- Yield to Maturity: 3.98%
- Credit Rating: A3/A-
Depending on how structured the deal is, the investment bank may charge anywhere from the same fees for a normal DCM issue or a little bit more.
What Qualifies as a Green Bond?
Given the benefits, it can be advantageous to label bond issuances as “green” – however, there are checks and balances to ensure that green bond issuances meet a defined criteria.
GBP recognized several categories of eligibility of green projects, which contribute to environmental objectives such as:
- Renewable energy
- Energy efficiency
- Pollution prevention and control
- Environmentally sustainable management of living natural resources and land use
- Terrestrial and aquatic biodiversity conservation
- Clean transportation
- Sustainable water and wastewater management
- Climate change adaptation
- Eco-efficient and/or circular economy adapted products, production technologies and processes; and
- Green buildings
Climate Bonds Standards provide green definitions and certification schemes.
Certication Scheme confirms a bond’s compliance with the Taxonomy and with number provisions around use of proceeds. https://www.climatebonds.net/files/page/files/cbi_standard.pdf
Who Issues Green Bonds? – Notable Green Bond Issuers
Any company, government agency or financial institution that develops, registers and sells a bond can also market a green bond.
A few examples of issuers are The Chinese Government (Sovereign), Toyota (Corporate/Multinational), the World Bank (Supranational), and the Ontario Financing Authority (Provincial/Regional).
The issuer usually selects a financial institution as a lead underwriter to administer/syndicate the issuance of the bond.
The World Bank was the first organization to issue a green bond back in 2008. Ginnie Mae and Fannie Mae also issued mortgage-backed securities with the “green” label, as has the European Investment Bank.
Globally, primary insurance is predominated by EU and Chinese governments and banks
Green bond league tables are dominated by major international banks that deal with governments. These are BNP Paribas, Credit Agricole CIB, HSBC, Citi and JP Morgan.
Canadian Green Bond Issuers
The list of Canadian green bond issuers is small: Canada’s federal credit agency, Export Development Canada (EDC); two provinces, Ontario and Quebec; Two cities, Ottawa and Toronto.
The Canada Pension Plan Investment Board (CPPIB) also issued green bond in June 2018 and it was the first pension fund to issue green bond.
Among corporates, Manulife was the first life insurer to offer green bonds.
Who Invests in Green Bonds?
They include individuals, companies and institutional investors (e.g. endowment funds, hedge funds, insurance companies, asset managers, investment companies, investment trusts, mutual funds, pension funds, sovereign wealth funds, etc.).
Green Bond ETFs and Funds
The VanEck Vectors Green Bond ETF (NYSEArca: GRNB) was the first fixed income ETF offering exposure to green bonds. As of time of writing, it helds 133 bonds with an effective duration of 6.38 years. GRNB tracks the S&P Green Bond Select Index, The annual expense ratio was 0.3%.
Green bond funds are mandated to invest in green initiatives, while other funds invest a portion of their proceeds in green projects.
iShare Green Bond Index Fund(IE) was initiated by Blackrock. It reflects the return of the Euro hedged version of the Bloomberg Barclays MSCI Green Bond Index, the Fund’s benchmark index (Index).
In March 2018, IFC joined forces with Amundi, Europe’s largest asset manager, to launch the world’s largest green bond fund. The Amundi Planet Emerging Green One fund closed at $1.42 billion shortly after launch, and is expected to deploy $2 billion in emerging markets over its lifetime. IFC pledged $256 million in start-up capital, while the European Investment Bank contributed $100 million.
The fund will invest in climate-smart initiatives in emerging markets, with proceeds deployed through 2025 and reinvested every seven years.