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Catherine Reichlin: green commitments, a sustainable trend?

Catherine Reichlin, Head of Financial Research at Mirabaud & Cie SA, explains this new approach, which puts environmental protection at the heart of investment. 

What is a green bond?

Green bonds are issued to finance a project that is directly linked to environmental protection, which explains the name. Managers of ‘socially responsible investment’ funds are particularly keen on these products, but they are also becoming increasingly popular among market players who do not specifically follow environmental, social and governance (ESG) criteria. To date, the largest issue was by GDP Suez (now Engie), which raised €2.5bn in two tranches during 2014 to finance several projects linked to renewable energy, such as the construction of wind farms. Another example is the Unilever group, which issued sterling-denominated debt to help reduce its carbon footprint. From a small-scale debut in 2007, the amounts outstanding are growing rapidly. Last year 129 issues were made, three times as many as in 2013. And this total should be exceeded by some margin in 2015. Most issues have so far been in Europe and denominated in euros, but the United States is now throwing its weight behind the market. In 2015, for the first time, total issues in US dollars could exceed those in euros. Since the start of the year, a growing number of American issuers are taking an interest in this market.

Is there a risk of green washing, or abuse of the term green?

At the moment, there are no standards, so a good deal of leeway exists. But the market is learning from its mistakes. Two years ago, Toyota launched a bond to finance projects that weren’t yet ready, which led to questions about how to place the funds raised until they were used. More recently, a Chinese company issued green bonds just to be able to meet its revenue target for renewable energy. That’s really not good enough. To deserve this label, signposting and reporting measures should be in place to prove to investors that the money has been used as the company promised. Around 60 banks have decided to get together to lay down some rules. The International Capital Market Association (ICMA) is providing the secretariat, which indicates the process is serious. One way to dispel suspicions of green washing would be to make the rules compulsory, which is not the case at the moment. Of course, specialised rating agencies also have a big role to play. The sector is still young but is quickly taking shape: the first indices have been in place for a year and there are already funds composed entirely of green bonds.

Is a green bond as good an investment as a classic bond?

The payments are exactly the same. This is key, because it’s not philanthropy. Two bonds with the same signature should not have different yields, because they involve the same economic risk for the investor. However, there are extra costs linked to reporting and the use of specialised rating agencies. At the moment, these are borne by the issuer and syndication. In time, it’s possible that the investor may make a contribution. This is key to widening the appeal of green bonds. The stakes are very high. At the last G7 meeting in June the group set a goal of reducing greenhouse gas emissions by between 40% and 70% by 2050. We’ll need to find a lot of money to finance this energy transition. Green bonds are the ideal tool to raise these funds. Some specialists estimate that they could represent 10% to 15% of total debt issues by 2020.

Photo : © J.-F. Robert

Green bonds: a rapidly growing market

The growth curve for green bonds – debt issued to finance projects linked to the environment – is impressive. Some specialists estimate that they could represent between 10% and 15% of total debt issues by 2020. There were only a few million dollars of issues in 2008, when the World Bank took the first steps. For a long time it was global financial institutions, led by the World Bank and its International Finance Corporation (IFC), that ensured growth in this new sector. But since 2014 private companies have played a massive part. GDF Suez, Unilever and Iberdrola, to name but a few, have helped build momentum that now seems irreversible.

As a backdrop to this development, many governments have made commitments to take action on climate change, and most observers are expecting the UN summit on climate change in Paris at the end of this year to consolidate this trend definitively. The other growth factor is endogenous in a sector that must restructure to implement standards, a key condition for it become robust and credible. Many believe that environmental, social and governance (ESG) criteria, which evaluate the quality of corporate social responsibility policies, are too broad.