The article below is from our BRIEFINGS newsletter of 22 April 2019
Green bonds, or bonds whose proceeds are earmarked for environmentally beneficial projects, have been growing steadily. To understand growth of the global green bond market and what’s ahead, we sat down with Alvaro Camara and Yasmine Coupal of the firm’s Investment Banking Division and Kyung-Ah Park, head of Goldman Sachs’ Environmental Markets Group.
The green bond market has been off to a strong start in 2019, with over $45 billion of issuance in the first quarter, up 50% year-over-year, according to Bloomberg. What’s driving this momentum?
Yasmine Coupal: The global green bond market is on track to have a record year. Rising issuer demand is driving this uptick, and there are several tailwinds at play. Increasingly, corporations are viewing sustainability as central to their strategies and are placing greater value on the reputational and transparency benefits associated with green issuance. Awareness of the environmental benefits of the underlying assets also continues to rise, stimulating demand from a broader set of investors and resulting in investor diversification.
Alvaro Camara: New political and sovereign mandates are also playing a role such as the European Union’s Sustainable Finance Action Plan, which aims to address climate change and accelerate the transition to a low carbon economy by incentivizing green finance. Not only are governments and corporations more committed to issuing green bonds, there’s also greater awareness and understanding about the impact that green bonds can have.
Green bonds are expanding into other forms of sustainability bonds and loans. What are those new areas, and why is the market expanding?
Kyung-Ah Park: Green bonds have been a powerful tool to tap into the deep and liquid fixed income market to shift capital towards positive environmental impact. If fixed income instruments can support financing for green solutions, they can also do so for other sustainability purposes, from alleviating poverty to lowering unemployment rates among disadvantaged groups. As a result, the green bond market has expanded to include social and sustainability bonds (which include both social and green). We are also starting to see green and sustainability linked loans.
AC: The green bond is the leading instrument of the sustainable market, largely due to its relatively simple nature. Its simplicity brings certain restrictions, namely limiting the uses for green, however, and so there has been a growth of different types of sustainable bonds and loans to meet varying client needs.
Despite impressive growth and expansion, sustainable instruments still comprise only a fraction of the global bond market issuance. What are the main bottlenecks, and what’s the path forward?
YC: Though there is a set of principles on how to issue a green bond, there’s still a lack of consistent global standards, which allows room for wide interpretation of what constitutes “green” making the market susceptible to claims of greenwashing. Given the early stages of the market, there is also limited quantitative data to demonstrate a price benefit between traditional bonds and those that are issued green. Thus far, because most of the green bonds are issued off of the balance sheet of the issuer, the green aspect of the bond does not affect its creditworthiness. There are some anecdotal examples of green bonds pricing slightly better than conventional bonds due to stronger demand from investors, but it’s still early stages of the market. Over time, if the market evolves in a way where the cash flows of a sustainable company or sustainable project is more resilient to risk and that is reflected in a stronger credit rating, then there should be a tangible pricing benefit.
What is your outlook on the future of the green bonds and sustainable finance?
KAP: The market will only become increasingly important to investors as clients continue to seek instruments that both generate attractive financial returns and demonstrate real environmental and social impact. Addressing climate change and achieving the UN Sustainable Development Goals will require vast amounts of capital to be deployed toward investments that promote sustainable and equitable economic growth. The green bond market, and more broadly, sustainable finance, provide a mechanism for channeling investment flows toward addressing these issues. We are at the beginning of the journey and the market for sustainable finance is poised to accelerate.