The Green Bond Market

What is a green bond?

"A green bond is a traditional bond, but it also provides great transparency to investors in different ways: 

• Funds raised are exclusively earmarked to the financing of specific projects or activities as opposed to refinancing the issuer's overall debt.
• These projects or activities must be proved beneficial from an environmental and/or social perspective.
• The issuer undertakes to demonstrate the traceability of the funds and the environmental benefits by reporting annually throughout the life of the bond or the projects.

It works in the same way as a traditional bond (e.g. payment of coupons)."

What is the proportion of social bonds (bonds with a social impact)?
 

"They remain the minority but are growing. These bonds are part of the green bonds market."

Why issue a green bond?
 

"To meet a growing demand from responsible investors who wish to identify the environmental impact of their investments."

Why is there such a growing demand?
 

"With the entry into force in 2015 of the French energy transition act for green growth, followed by the COP 21 climate change agreement in 2016 (194 signatories), many institutional investors have became aware of global warming issues. Consequently, a more responsible ‘green’ finance was born. Subsequently, funds of green bonds emerged to allow individual investors to produce an environmental impact through their bond investments."

Are all green bonds issued really green bonds?
 

"In a context of growing enthusiasm to improve the environment, each company has gradually reported on the environmental, social and ethical aspects of its activities (corporate social responsibility, or CSR).

However, on the green bonds market, some 'green' projects have been financed without clearly demonstrating their environmental benefits, or the capital raised on ‘green’ grounds have sometimes served to finance or refinance an issuer’s traditional activities. This is known as ‘green washing’."

What is the basis for analysing a green bond?
 

"In order to standardise the market, guidelines have been defined by the ICMA (International Capital Market Association). These are known as the Green Bond Principles. They recommend that issuers of green bonds provide transparency, information and reporting. The criteria cover 4 areas:"
 

• "The process of eligibility and evaluation of projects or activities presented as ‘green’."
• "Use of funds: a specific allocation between the defined projects."
• "Fund management: monitoring of the gradual allocation of raised capital to projects based on investment needs, cash management and traceability tools."
• "A reporting system: periodicity, information granularity, CO2 impact indicators, etc."

"Additional guarantees may be provided through the following external means:"
 

• "Certification of the issue by the CBI (Climate Bonds Initiative, an independent international body)."
• "Rating of the ‘green’ nature of the issue by Moody's and/or S&P."
• "Analysis by independent auditors: provision of a ‘second-party opinion’ (Vigeo, Sustainalytics, etc.) or even a ‘third-party opinion’ (e.g. KPMG, Deloitte, etc.)."

Does it cost more to issue a green bond?
 

"Yes, on account of the vast analysis and expertise required to select projects and measure their impact on the environment (invoicing of external experts upstream and throughout the life of the bond to establish a reporting system)."

What is the history of this market?
 

"The first green bond was issued in 2007 by the EIB (European Investment Bank). The market started to grow in 2014 with the issuance of corporate green bonds. But the growth of green bonds was particularly spectacular in 2017, representing $141.7 billion equivalent, and 40% of the green bonds market at the end of February 2018. This issuance avalanche was probably encouraged by very accommodative funding levels in euros (main currency of issue)."

What is the size of this market?
 

• "At the end of February 2018, green bonds amounted to $350.3 billion equivalent."
• "Only the liquid portion of this market (issues of at least $200m equivalent) represents a market size of $240.7 billion equivalent."
• "For information, the global bond market today represents $65,000 billion equivalent"

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What are the main types of issuer?
 

• "48% are sovereigns and supranationals."
• "29% are corporates."

What is the breakdown of issuers by rating?
 

"Issuers rated between AAA and A-

make up 77% of the green bonds market."

What is the breakdown of issuers by country?
 

"French issuers (18%) and supranationals (15%) are the main issuers."

What is your conclusion?

"The green bonds market is a nascent, rapidly-growing market. But it is not homogeneous (e.g. the comparison of CO2 gains in different projects) and 7% of green bonds still have no reporting. Similarly, only 83% of issues benefit from a ‘second-party opinion’ (and 75% a ‘third-party opinion’). Finally, we would like to see, in this market, more issuers of truly polluting sectors (steel plants, mines, etc.), sovereigns (only 6% of issuers) and issuers originating in the US, China or the United Kingdom. Today they are still quite poorly represented."