Originally published 1.18.2021
Green bond issuance last year hit a record—the pandemic couldn’t stop the surge in investor appetite for anything related to renewable energy and environmental responsibility. This year, this new market is set for even stronger growth as energy sustainability becomes the theme of the decade. Last year, total sustainable debt hit a record high of $732.1 billion, BloombergNEF reported earlier this month. This was up by 29 percent on the year despite the pandemic or maybe because of it: the pandemic proved an opportunity for some governments to reinforce and strengthen their commitments to their green agenda.
Take the European Union, for example. The EU already had ambitious green energy goals before the pandemic ravaged its economy. But instead of worrying how it would juggle these goals with the billions of euros in relief and recovery programs it needed, the EU is tying the two together. Member states will only receive relief funds if they pledge to invest a substantial portion of it in green technology.
In fact, earlier this month, the ECB went even further. The eurozone’s central bank was, at the start of this year, allowed by Brussels to buy ESG bonds in its asset purchase offensive aimed at propping up the zone’s ailing economy. This makes it the first central bank in the world to add ESG bonds to the range of assets eligible for purchase as part of quantitative easing efforts.
What are these ESG bonds, then? Environmental, social, and governance debt issued by companies could either be used to address social issues (social bonds), environmental issues (green bonds), or be used to target both social and environmental problems (sustainable bonds). Sustainable bond issuance last year shot up by 81 percent compared to 2019, according to BloombergNEF, eclipsed only by social bonds.
According to Reuters data, the issuance of bonds to fund sustainable projects rose twofold last year, to a record high of $544.3 billion. Together with loans for sustainable projects, the amount lent for sustainable projects hit $750 billion, the news agency reported last week, citing data from its service Refinitiv.
There seems to be little doubt that the market for green debt is thriving. There is also little doubt as to the drivers behind this thriving. The EU is one example, but it is not the only one. U.S. president-elect Joe Biden’s pandemic recovery plan, worth $1.9 trillion, also ties the distribution of funds to renewable energy targets. Even the IMF’s chief recently named green projects crucial for the world’s recovery from the pandemic.
No wonder then that analysts expect the boom in green bond issuance to continue this year: Swedish bank SEB told the Financial Times it expected green bond issuance to hit $500 billion this year. That would compare to an estimated $270 billion in sales of green bonds last year. The EU alone will issue more than $270 billion in green bonds this year, the FT notes, as part of the loan part of its pandemic relief program, which is worth over $905 billion.
Given this growing interest in the green transition – growing so strongly that even Wall Street banks are now jumping on the green bandwagon – chances are we are about to see a true boom in green and sustainable bonds. But since this is not a perfect world, there are challenges.
The biggest of these were laid out back in 2018 by the World Bank’s Director of Economic Policy and Poverty Reduction programs for Africa, Marcelo Giugale. Green bonds, Giugale noted, are not exactly cheaper than “normal” bonds. But they are fungible. That is, they could be used for a purpose different from the one stated as the purpose of their issuance. It is the latter that today seems to be of particular concern: the EU is now on a quest to regulate the nascent green debt market in order to make sure the money raised for sustainable projects is indeed used for sustainable projects.
“It is hard to overstate the impact that the regulations will have,” Thomas Tayler, senior manager at Aviva Investors’ Sustainable Finance Centre for Excellence, told the FT’s Siobhan Riding earlier this month. “It is going to change the way people run their businesses by putting sustainability right at the heart of the investment process.”
In other words, the regulation push will aim to make sure the money poured into green investments is indeed used for these investments. This will mean asset managers offering sustainable funds to investors will need to verify these funds are indeed sustainable, making a market that has been quite opaque so far rather more transparent. Regulation should also take care of concerns regarding “greenwashing” by companies without actual plans to become more sustainable but eager to improve their reputation.
The green debt market seems set to really flourish this year thanks to the rush to decarbonize economies and businesses. And maybe the best part in this rush is that now even big polluters can use green bonds to reduce their emissions: there is now a new type of green bonds that include a specific commitment by the issuer to reduce its greenhouse gas emissions by a set amount by a certain date. This sort of commitment would likely make polluting issuers more credible in the eyes of bond buyers, expanding the green bond market further.
By Irina Slav for Oilprice.com