Green Bonds and Bright Futures

Partnership Bulletin’s Jonathan Davies takes stock of Green Bond policy and what’s on the horizon this year

The policy tide is turning on climate change in the world’s great powerhouses: China has committed to NetZero by 2060, the EU is looking for its Green New Deal to supercharge its economic recovery and the incoming Biden administration in the US has already pledged to put climate change at the centre of its vision of the future.

Now that the policy has been largely set, however, the practical questions for our industry need to be answered: what technology is needed? which projects first? and, crucially, how is it all going to be paid for?

Long touted as the future of financing for green projects, the appetite for green bonds has been steadily rising over the last few years, reaching a new high of 3.5% of all global bond issuances in 2019 at around £190bn, an increase of over 50% on the previous year.

As the host of COP 26 later this year, the UK is firmly in the spotlight of the climate agenda, and has shown eagerness to be seen at the forefront of developments. In November, Chancellor Rishi Sunak confirmed plans to issue a Sovereign Green Bond in 2021, telling parliament at the time: “These bonds will help finance projects that will tackle climate change, finance much-needed infrastructure investment and create green jobs across the country.”

This is just the beginning of the UK’s plans for green gilts, with Sunak adding that there will be multiple issuances in the future to “meet growing investor demand”.

Although new innovative instruments are surely welcome, policy for regulating and certifying green bonds is just as important; a lot of work is needed in how progress is measured, for instance, but the “policy landscape is expected to change significantly in the run up to COP 26”, Norton Rose Fulbright predicts.

Similar progress has been made in the EU, which, although slightly delayed, last month announced that the European Commission will make a legal proposal for an EU Green Bond Standard by June this year.

The EU’s Valdis Dombrovskis, executive vice-president for Financial Stability, Financial Services and Capital Markets Union, said: “Green bonds will help boost the wider private sector buy-in that we need to jumpstart a sustainable economic recovery that is in line with the European Green Deal.”

With the euro as one of the main currencies used for the issuances of green bonds around the globe, the official EU Green Bond Standard could bolsters its leading role and consolidate it as one of the world’s green finance hubs.

Although Europe has pioneered the world’s ESG push, it’s not the only place making waves in the green bond market.

The green sukak, an Islamic eco-bond, has seen strong growth since its first issue in 2017, reaching US$130bn in 2019, a 41% increase on the previous year.  As Turkey, Qatar, Malaysia, Bahrain and Indonesia lead the Islamic world’s charge towards green finance, the World Bank has said that it “should only be a matter of time before efforts to tackle climate change and achieve national sustainable development goals begin to manifest in the greater issuance of green sukuk both in terms of number and volume of issuances”.

Of course, the supply is fuelled by demand. The private second is showing not only a healthy appetite for green money, but also for wearing it as an accolade. At the tail end of last year for example, Vinci reported that its inaugural green bond issue was more than five time oversubscribed and Canberra’s Light Rail PPP boasted that it had gone “even greener” with its new green loan refinancing.

Momentum is surely building in the green bond market; if governments can get the policy right, the green bond could be mortar to help nations build their eco-future.