The green bonds boom is only growing in size.
Today, rating agency Moody’s reported that green bond issuance hit a record high in the third quarter of this year demonstrating the expanding demand for ethically-labeled fixed-income instruments from investors.
Green bonds were created to fund projects that have positive environmental and climate benefits with the majority of bonds issued use of proceeds” or asset-linked bonds. Proceeds from these bonds are earmarked for green projects but are backed by the issuer’s entire balance sheet.
According to the Moody's report, $32.7 billion of green bonds were issued globally in the three months to end-September, topping the $32.2 billion raised in the second quarter of the year. 83 issuers brought 111 transactions to market, with average transaction size increasing 6% quarter-on-quarter to $295 million. The report also notes $95 billion has been raised from green bonds during the first three quarters of this year, up 49% year-on-year, with full-year volumes set to top $120 billion.
Data from HSBC suggests that Moody's full-year issue totals may be conservative estimates. The Asia-focused bank noted recently in a report that green bond issuance is on track to hit $125 billion this year, followed by supply of $140 billion to $180 billion for 2018. This would make the green bond market $423 billion to $463 billion in size by the end of 2018.
Green Bonds Boom Set Hit A Record This Year
The demand for investors from these products is understandable as they offer both yield, opportunity for capital gain and the knowledge that buying the bond will contribute positively to the environment. One trade HSBC recommends, for example, is Banco Nacional de Costa Rica’s $500 million 5.875% of April 2021 green bond. This Ba2/NR/BB security was issued in April 2016:
"Proceeds from this security are intended for renewable energy, namely wind, solar, and hydro, as well as for and ‘wastewater’ projects. For the hydro component, Banco Nacional will only invest in projects up to a total installed capacity of 50MW.
Banco Nacional did not obtain a Second Party opinion or third party verification, which is a clear negative. However, they have committed to reporting annually on the use of proceeds. Banco Nacional de Costa Rica states that this bond funded $505 million investment into eligible green projects: $390.9 million for six hydro plants with a total installed capacity of 197.3MW, and $114.4 million for four wind farms with a total installed capacity of 112.5MW."
Plenty of other issues offer similar characteristics and benefits. Another trade HSBC likes right now is Anglian Water:
"Anglian Water issued the first index-eligible GBP green bond for two years, the 1.625% £250 million bond maturing on 10 August 2025.
Even though Anglian is a water utility, the firm focuses on carbon emissions reduction: Anglian sees cutting carbon emissions as a proxy for driving out waste and costs. Anglian argues that from now on, any capex it undertakes is green, since it won PAS 2080 accreditation at the beginning of this decade. PAS 2080 is a UK Green Construction Board standard, offering a framework for managing carbon in infrastructure.
Anglian suggested it will from now on issue green bonds to fund new capex. However, it is likely to issue non-green bonds to refinance maturing bonds that funded pre-PAS 2080 capex, as these old assets are considered to have been non-green."