1. Research
  2. Products & Topics
  3. Special
  4. Thematic
To listen to a podcast version of this article click here

Green Bonds – Increasingly Relevant in the Corporate Bond Market

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.
For important disclosure information please see: https://research.db.com/Research/Disclosures/Disclaimer

© Copyright 2023. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, licensed to carry on banking business and to provide financial services under the supervision of the European Central Bank (ECB) and the German Federal Financial Supervisory Authority (BaFin). In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG, London Branch, a member of the London Stock Exchange, authorized by UK’s Prudential Regulation Authority (PRA) and subject to limited regulation by the UK’s Financial Conduct Authority (FCA) (under number 150018) and by the PRA. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Inc. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.