There does, however appear to be some degree of compromise as their positive marketing value is priced into issuances.
Mark Mansley, CIO at the Environment Agency Pension Fund, which invests in green bonds in a “modest way”, says: “Currently green bonds trade very close to their non-green alternatives – if they were significantly more expensive then we would be less keen. There is some evidence that new issues of green bonds require less of a yield premium than conventional bonds to get them away at issue, indicating they provide a marketing advantage and making them attractive for issuers and slightly less attractive for investors able to access and keen to find value in the primary market.”
NOT ENOUGH SUPPLY
Mansley also points to lack of supply as an issue for institutional investors. “As primarily sterling investors interested in relatively longer maturity bonds and seeking a reasonable amount of credit risk exposure (to get some yield pick up), there are not many suitable offerings,” he says. “This is the biggest limitation for us – sterling green bond issuance is only a fraction of the total.”
For the market to become more attractive, Mansley says there would need to be more bonds issued, lower maturities and more issuance by corporates and projects offering reasonable spreads (i.e. issuance by A/ BBB credits).
“We would also like green bonds made more accessible to smaller entities (borrowers) where there is little doubt about their green credentials (e.g. renewable energy projects, social housing etc),” Mansley says. “We currently have quite a bit of bond exposure in uncertified bonds which we are satisfied are essentially green – issued by typically smaller borrowers reluctant to spend large sums on certification,” he continues. “To some extent our bond strategy is about finding value/quality/sustainability in the unrated/smaller/less recognised parts of the market, which is somewhat at odds with the high profile and transparent nature of green bonds.”
SUPPORT FOR CONTINUED GROWTH
As the green bond market continues to grow and more entities issue bonds in the market, concerns about the ability of the green bond market to absorb institutional level flows diminishes and the range of available bonds with varying characteristics should begin to increase.
The last 12 months have seen some notable issues of green bonds. Apple’s $1.5bn green bond issuance in February this year was hailed by many as a landmark for the asset class, which according to Gacon is becoming “the single most important instrument in the fight against climate change”.
The Chinese authorities certainly appear to share this view. China has been one of the main engines of growth for green bonds over the last year and their support is unlikely to wane any time soon. China will host the G20 this year and is already promoting the idea of mobilising financial markets to tackle climate change and sees green bonds as a key vehicle to do so.
