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Inside magazine issue 12 | Part 03 - From a corporate perspective
One commonly cited concern,
for example, is that most
projects behind green bonds
are actually not new projects,
but old projects or projects
that would have been funded
anyhow.
It is clear that green bonds have emerged
as one of these important innovations.
As the OECD notes, green bonds are
especially valuable as financial instruments.
The reason for this is that critical green
investment needs, such as infrastructural
investment related to the renewable
energy sector, are typically amenable
to bond financing—combining, as they
frequently do, high initial capital costs with
long-dated income streams that tend to be
inflation-linked. 17
Still, even if we accept the strong economic
and non-economic case for green
investment wholesale, and the robust
argument that bonds are, for a variety of
reasons, potentially a good instrument
for funding low-carbon infrastructure, it is
clear that the demonstrable necessity, even
cost-effectiveness, of climate action does
not, by itself, generate a market for green
bonds. For this, we need to look more
closely at issuer and investor incentives in
this space.
Issuer incentives
At first glance, it is not clear why there is
such a drive among issuers (a population
comprising, in order of significance:
multilateral development banks, bilateral
development and trade agencies,
subnational bodies and cities, energy
and utilities companies, corporations
and commercial banks) 18 to opt for green
bonds. The World Bank 19 suggests that
this is something of a long-term strategy,
since market trends could see pricing
variation emerge in the future, should
demand for green bonds continue to grow
(there is currently no price advantage
for green bonds as compared to regular
ones). If that is the case, indications are
positive, with the Climate Bonds Initiative’s
2015 report citing “continuously growing
investor demand, particularly by institutional
investors and corporate treasuries … shown in
oversubscriptions as well as billions in pledges
… [by a range of banks] … to invest in green
bonds.” 20
Moreover, as the World Bank notes, green
bonds have the advantage of allowing
issuers to diversify their investor portfolio.
Environmentally conscious investors
(forming part of the SRI investor family) are
a particular and growing target population
that green bonds have allowed issuers to
tap into, perhaps for the first time. This
enables the growth of economies of scale,
which is clearly a financially attractive
prospect particularly since, as the OECD
notes, the bulk of costs for issuers are the
upfront costs of setting up processes. 21
Green bonds have also served as a
communication tool, allowing issuers
to show their investors the types of
climate project that they are funding,
and increase their reputational capital. 22
For governments and international
development banks, the incentive to
demonstrate their green credentials
is obvious. But there’s an incentive for
corporates too (a burgeoning class
comprising the green bond issuer
community). Earlier in the article, we noted
how sustainability is becoming a core
business concern. Against this backdrop,
as Zurich Insurance Group’s Responsible
Investment Chief Manuel Lewin pointedly
states: “Issuing a green bond is a signal
to the market that here is a company that
thinks about risks related to climate change
and to other environmental challenges and
has a plan for how to tackle them by making
investments to address them. This could and
should affect the broader assessment of the
credit risk of that issuer.” 23
The more skeptical perspective of
green bonds as a vehicle for shoring up
“reputational capital,” of course, is the
view of green bond issuance as either a
relatively shallow marketing ploy or as an
attempt to pour old wine into new bottles.
One commonly cited concern, for example,
is that most projects behind green bonds
are actually not new projects, but old
projects or projects that would have
been funded anyhow, but that are now
increasingly being wrapped up as green.
There are also concerns that issuers might
be using the green label to gain market
attention in the broader corporate bond
market, which is developing for reasons
that are potentially broader than green
finance. These concerns are partly driving
the trend we are seeing for increasingly
stringent (albeit currently still voluntary)
standards and second opinions on the
credentials of issues in the green bond
space.
Investor incentives
For investors, a range of incentives have
been cited. There is some debate, but little
in the way of clear evidence, as to whether
investing in green bonds is—from a purely
financial perspective—preferable to regular
vanilla bonds.
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