The appetite for Green Bonds is beginning to expand far beyond niche investors as the economic and social benefits of clean energy projects combine for a very attractive investment product. Green Bond (sometimes called climate bonds) issuances increased more than fivefold in 2013, with 29 deals worth a total of $11.2 billion according to Dealogic. 11 bonds have already been issued in 2014, worth a total of $3.78 billion.
Suzanne Buchta, global head of green debt capital markets at Bank of America Merrill Lynch, said the market is “set to explode” this year. “I think we saw a real inflection point in 2013 and we’re on pace to hit the $20 billion target this year. It’s only March and we’ve seen quite a number of deals already”.
Citigroup Inc.’s head of environmental finance, Michael Eckhart, said that bonds backing clean-energy and environmental ventures may account for 10 percent to 20 percent of the $7 trillion-a-year market for the securities within a decade.“We’re going to see a multiplier effect as we scale up use of these mechanisms. This is the beginning of a transition from bank loans and equity financings to refinancings in the capital markets for this industry. We talked about it three years ago. Now we’re doing the deals”.
The year began with the announcement of voluntary guidelines for green bonds by a consortium of leading banks including Bank of America Merrill Lynch, Citi, Crédit Agricole Corporate and Investment Bank and JPMorgan Chase. The Green Bond Principles recognize several broad categories of potential eligible green projects, including renewable energy, energy efficiency (including efficient buildings), sustainable waste management and land use (including forestry and agriculture), biodiversity conservation and clean transportation and water. The Principles also recommend the selection of projects whose environmental benefits can be described, quantified and assessed.
- Solactive AG, a German provider of financial market indices, has launched the Solactive Green Bond Index, which provides exposure to green bonds, based on a universe provided by the Climate Bonds Initiative. To be included in the index, bonds must have an amount outstanding of at least $100 million and a minimum remaining time to maturity of 6 months. Convertible bonds and inflation-linked bonds are excluded. All bonds are weighted according to their market value with a maximum of 5% per bond.
- According to the Climate Bond Initiative, Toyota will soon close on the world’s first green bond backed by electric vehicle and hybrid car loans to be specific. Citigroup structured the $1.75 billion bond along with co-managers Bank of America Merrill Lynch and Morgan Stanley, BNP Paribas, Credit Agricole, JP Morgan and Mizuho. The car loans included in the bond will be required to meet standards of energy efficiency in regulations set by the California Environmental Protection Agency’s Air Resources Board.
- SunPower (SPWR) is attempting to follow in the footsteps of SolarCity (SCTY) and intends to issue bonds backed by solar assets later this year. The solar asset backed securities pool together power purchase agreements from utility scale plants or residential solar leases, and pass on the payments from these assets to debt investors. Solar companies such as SunPower and SolarCity have been seeking alternative ways to fund projects as the federal solar investment tax credit, which has traditionally helped to attract capital from tax equity investors, is set to drop to about 10% by the end of 2016 from its current 30% credit. Securitization of its assets through green bonds is becoming an important mechanism for the industry, and will expect to play in even larger role in the near future.
- Late last year, Bank of America (BAC) issued a three-year, fixed-rate $500 million Green Bond as part of the bank’s 10-year, $50 billion environmental business initiative whose proceeds will target alleviation of climate change and accelerate the shift to alternative energy and energy efficient resources.
“Bank of America viewed this issuance as an opportunity to expand its investor base and to support an important market as investors seek more socially responsible investment options,” the company said in its announcement about the bond.
- Zurich Insurance Group recently said it aims to become the largest global green bonds investor, with an initial target of $1 billion.
“Green bonds are a good fit with Zurich’s overall investment strategy as well as its impact investing aspirations, targeted to support sustainable development and resilient communities,” says Cecilia Reyes, chief investment officer with the insurer. “It is an opportunity to invest both with impact and at a return fully compensating for the risk.”
- The European Investment Bank (EIB) has issued its first green bond of 2014; $388 million placed with Swiss investors to support more low carbon energy projects. The latest transaction saw a number of new investors participate in the issuance.
“This confirms that climate awareness in the capital markets is growing and that larger CABs are the right product at the right time,” said Eila Kreivi, director and head of the EIB’s capital markets department. “EIB is committed to an ongoing dialogue with socially responsible investors and to accomplishing actual demand via timely supply.”