With Poland issuing the world’s first sovereign green bond totalling 750 million euros in December and France following suit with an even larger issuance of 7 billion euros earlier this year, investment managers expect the market for green bonds will continue to grow.
“Based on trends, 2017 will probably be the year where we’re going to break the $100-billion-equivalent issuance mark,” says Stephan Bonte, director of sustainable investing at Standish Mellon Asset Management Co. He notes the green bond market took off in 2013, with more than $10 billion issued, and has since expanded to about $90 billion in 2016.
It’s interesting to see national governments entering the market with sovereign green bonds, says Randall Malcolm, managing director and portfolio manager for Canadian public fixed income at Sun Life Institutional Investments Inc. Until last year, corporations, financial institutions, development banks and sub-sovereign issuers had largely occupied the space, says Malcolm.
He attributes the sovereign interest and market growth to the preferences of investors’ underlying stakeholders. “I think people are thinking about this more over the long term in terms of being green. So trying to support any bond that has environmental and climate-positive effects is viewed as a good thing by shareholders or pension plan members.”
But apart from the environmentally friendly image they carry, do green bonds offer better value than standard bond offerings?
According to Bonte, they should trade at similar levels to standard bonds coming from the same issuer. “They exhibit the same underlying credit risk. We think the trading characteristics, for the most part, should match those of non-green bonds from the same issuer with similar size and maturity.”
At one point, France’s green bond was trading 13 basis points over an existing French treasury bond, according to Wolfgang Kuhn, head of euro fixed income at Aberdeen Asset Management in London, England. “So you’re not talking significant pickups, which is a reason we personally weren’t involved, because unless we have clients who have given us a specific mandate to participate, it’s simply a question of whether it’s justifiable on a relative-value basis.”
Kuhn adds that while there’s merit in pursuing bonds with green features, it’s important to consider other factors, such as pricing, liquidity and value.
However, sovereign or sub-sovereign bonds may have slight advantages, says Malcolm. For example, Ontario is rigorous in its funding principles for green bonds and aligns them with those of the International Capital Market Association, he notes. “It’s what we would consider a best practice in this market. So when you look at what Ontario is doing, how they’re choosing their projects, there’s a very thorough criteria involving the government as well as the Ontario Financing Authority,” he says.
“They also have a green bond advisory panel that reviews projects . . . through a very thorough auditing process involving the auditor general of Ontario and they report back to issuers on an annual basis on how proceeds are being used.”
Ontario, one of the first sub-sovereign issuers of green bonds, has used the capital raised to lower carbon intensity, improve energy efficiency and build transportation projects, according to Malcolm. Improving water quality is another big theme among issuers like municipalities, he notes.
Further growth projected
While it doesn’t make sense to force green bonds into a portfolio, some clients are encouraging investment managers to look more closely at what may work for them, says Bonte. “So as issuance grows, as diversification grows, and sovereigns are definitely a big part of this, we’re going closer to the point where a standalone green bond portfolio is becoming more reasonable. Two years go, this wasn’t feasible.
“I still think it’s fairly difficult to obtain a well-diversified green bond portfolio in the current environment, but maybe in the next few years.”
Jann Lee is an associate editor at Benefits Canada.
Get a PDF of this article.