Green Bonds Will See Breakaway Growth in 2018, Analysts Predict

Two different groups of analysts in the United Kingdom and Canada have come up with fairly widely divergent assessments of the 2018 market in green bonds. But they agree that market is set for another year of breakaway growth.

The Climate Bonds Initiative tallies last year’s green bond activity at US$155.5 billion and foresees this year’s activity growing 61 to 93%, to between $250 and $300 billion. TD Bank, meanwhile, places the 2017 market at $119 billion and predicts 34% growth this year, to a threshold of $160 billion.

“Investment in renewable energy continue to be the most common use of proceeds, however their share has dropped considerably, from 38% of volume in 2016 to 33% in 2017,” Climate Bonds notes. “Allocations to low-carbon buildings and energy efficiency rose 2.4 times year-on-year and accounted for 29% of 2017 use of proceeds, up from 21% in 2016.” Meanwhile, “with a multitude of rail and urban metro deals, allocations to low-carbon transport almost doubled in volume.”

“The sector has experienced extremely strong growth over the past several years as funds with socially responsible mandates continued to chase scarce supply,” TD wrote analyst Gennadiy Goldberg.

Climate Bonds CEO Sean Kidney said the 2017 results “point to the areas for acceleration between now and 2020,” including greening of China’s Belt and Road infrastructure initiative, and growth in the investment market in India.

“More brown-to-green financing initiatives will emerge from global energy suppliers and the large emitters, as institutional investors look for corporate business plans and hence balance sheets to be increasingly geared towards the achievement of the Paris targets and the wider clean energy and low-carbon transition,” he added. “With the world’s largest bank in China, ICBC, and other leaders from Europe to Australia issuing green bonds, expectations will grow on all the top 200 banks to commence green lending programs.”

Climate Bonds lists the United States first and Canada tenth in the global race for green bond issuance. The three biggest issuers were Fannie Mae, New York MTA, and Apple Inc. in the U.S.; TD Bank, Export Development Canada, and the Province of Ontario in Canada.

The other jurisdictions on the top 10 list, from second to ninth place: China, France, Germany, a “supranational” category of international financial institutions, Spain, Sweden, The Netherlands, India, and Mexico.

Corporate Knights CEO Toby Heaps noted that some investors might be willing to take a “small haircut” on their financial returns if they know they’re investing in green assets.

“As an issuer, you can save a few points in terms of what you’ve got to pay to raise your money,” he told the Financial Post. “It’s a legitimate step forward to the green economy, not a sort of PR step.” (h/t to Corporate Knights for pointing us to the Financial Post coverage)