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Green Bonds – Increasingly Relevant in the Corporate Bond Market

Author
Craig Nicol
+44(20)754-57601
There were few asset classes that saw quite the stratospheric growth in 2019 like the green bond market. Now, even though it’s a decade or so old, the market is still very much in its infancy and last year we saw a bit over $250bn of green bonds issued around the world. Because this is tiny relative to the wider corporate bond market, green bonds don’t receive a lot of attention. But that is changing quickly. The growth of the green corporate bond market is impressive, more than three-quarters of the market comes from the US or Europe, with the latter making up nearly 60% alone. China makes up just 5%. Currency-wise, 95% of these bonds are denominated in either USD or EUR. At a sector level, utilities (39%) and banking (33%) dominate.
In Europe eligible green projects for bonds include renewable energy, energy efficiency, pollution prevention and control, eco-efficient and/or circular economy adapted products, production technologies and processes, green buildings, terrestrial and aquatic biodiversity conservation and clean transportation amongst others.
Historically, the green bond market was dominated by surpranationals and quasisovereigns. However, the emergence of a more rigorous framework around the definition of green bonds, namely the establishment of the Green Bond Principles from the International Capital Markets Association (ICMA), as well as the greater focus on climate change, has seen both corporates and financials start to gain market share. In 2018 and 2019 around half of green bond issuance came from either corporates or financials. Currently, the size of the index-eligible global green bond universe of financial and corporate issues is $179bn.
The Climate Bonds Initiative (CBI) – a global NGO focused on climate change solutions – recently forecast that issuance could be as much as $350-400bn representing issuance growth of 29% to 48%. Assuming a similar split of corporates and financials versus surpras/quasi bonds, this could mean green corporate bond issuance of around $175-200bn. A recent market survey focusing on Europe1 also indicated that demand is outweighing supply with two-thirds of respondents overweight green bonds. Results also showed that almost half of the respondents have a specific green bond fund and a third have specific mandates or targets.
There is still no universally accepted global framework – and as such, standards and regulation remain a concern. The CBI identifies 7 different categories of use of proceeds but a further 67 sub-categories. This includes anything from solar energy to bicycle infrastructure, and from waste prevention to forestry. The good news is that, at least in Europe, a classification system aimed at strengthening the market's legitimacy appears to be underway. Late last year EU policymakers agreed on common definitions for environmentally friendly investments, primarily intended to avoid "greenwashing". 
The agreement means that financial products will be categorised into three levels of 'greenness' and according to a news outlet will also require full disclosure for all financial instruments, which will force funds without sustainability claims to disclose that they are not assessed under the green criteria. The deal still needs to be approved by the European Commission but appears to be a step in the right direction for now.
This is an extract from ‘Green Bonds – Increasingly Relevant in the Corporate Bond Market’. To read the full report click here. To access you will need to be a client of Deutsche Bank Research.
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