The news emerged earlier this year that Stockholm-based Skandinaviska Enskilda Banken (SEB) had topped the Climate Bonds Initiative’s first annual Green Bond Underwriters League Table, following a milestone year in which a record $36.6bn in green bonds had been issued. Once a niche product with limited appeal, a growing focus on climate-related opportunities has pushed the market firmly into the limelight, and green bonds could conceivably hold the key to remedying the continent’s economic malaise.
Defined under the terms of the Green Bond Principles as an instrument that enables capital-raising and investment facilities for projects with environmental benefits, the green bond market has enjoyed a spell of unprecedented growth in the last year. And, with many of the key issuers and projects based on European soil, the continent has emerged lately as a key platform for action on climate change. “We believe we can reach $100bn of green bond issuance globally in 2015”, said Climate Bonds Initiative CEO, Sean Kidney. “And doing so would take a powerful message about investors and issuers driving change to governments at the UN Climate Conference in Paris in December.”
The shift to renewables is not without its price, and EU estimates show that meeting a 40 percent emissions reduction target could cost €216bn, as opposed to €88bn in meeting the lesser 30 percent rate
Assuming that the trend continues in much the same way, where SEB dominated headlines at the beginning of the year, the UN Climate Conference in Paris could feature heavily towards the latter stages. “The reliability and sustainability of our future energy system depends on investment”, said Maria van der Hoeven, Executive Director of the International Energy Agency (IEA), in the World Energy Investment Outlook. The global economy needs an estimated $53trn before 2035 to head off climate change and Europe is still struggling to pull itself out of the doldrums, yet a thriving green bond market could hand the region the pick-me-up it so desperately needs.
Environmental bonding
Green bonds – or climate bonds – are fast making their mark on the financial landscape, and where once money-hungry investors looked to fossil fuels for an easy return, a budding interest in environmental protection has seen that sector suffer the effects of changing investor sentiment. SEB’s Head of Sustainable Products, Christopher Flensborg, says that the instrument is “good for business”, adding that “it is not only about being a good citizen, but managing your finances responsibly”.
After an impressive 2013, the last year dwarfed any and all that came before it. At $36.6bn, more than three times the previous year, the explosion was fuelled in large part by the introduction of corporate and municipal issuers to the green movement. And with development banks and corporate issuers occupying a 44 and 33 percent share of the 2014 pie respectively, there’s no shortage of participants in a market rife with opportunities, and one that represents a key part of the region’s actions on climate change.
“The European green bonds market is growing fast, not only in much-needed size, but also in variety, with high-yield green bonds from Spanish renewable energy company Abengoa Greenfield last autumn”, says Tess Olsen-Rong, Market Analyst for the Climate Bonds Initiative. “In fact, the majority of the top green bond issuers in 2014 were European.”
Looking at the top 10 green issuers of the year, the top three spots are all occupied by European institutions, with the European Investment Bank (EIB) sitting way out in front with an impressive $5.6bn to its name. The lender made waves in January 2014, when it became the first institution to issue a Climate Awareness Bond; an instrument that raises funds from fixed-income investors to support EIB-sponsored renewable energy and energy efficiency projects.
Third-placed GDF Suez, meanwhile, stole the headlines later in the year when the French utilities firm issued the largest corporate deal of the year, at €2.5bn. The bond was issued in two tranches, and served to highlight the strategic priorities and sustainable growth strategy set out by GDF Suez. However, most significant was that the bond was on sale for only two and a half hours, yet was three times oversubscribed despite being upsized significantly, therein eliminating any fears that demand for sustainable investment does not exist.
Tough targets
The developments in the European green bonds market are closely in keeping with ambitious EU renewable and energy efficiency targets, which stipulate that 20 percent of the bloc’s consumed energy should be provided by renewables by 2020. Add to that a recent deal to cut greenhouse gas emissions by at least 40 percent by 2030, and the importance of sustainable infrastructure investment in realising these ambitions is clear.
With Europe struggling to shake off deflation and oil prices compounding pressures on an already squeezed energy sector, the region can ill-afford to have energy security exacerbating the issues at hand. Figures show that with increased investment in renewables and energy efficiency comes economic growth, not to mention the jobs that would come in choosing to reduce the EU’s reliance on imported energy sources. However, the shift to renewables is not without its price, and EU estimates show that meeting a 40 percent emissions reduction target could cost €216bn, as opposed to €88bn in meeting the lesser 30 percent rate.
Advancements in sustainable technology mean that renewables are nearing competitiveness with fossil fuels, yet the infrastructure to accommodate a so-called clean energy revolution is not yet adequately in place. The IEA’s Energy Technology Perspectives 2014 estimates that roughly $1trn more in investment is needed each year until 2050 to finance the necessary infrastructural improvements on the way to keeping global warming to two degrees Celsius – four times greater than current levels.
An essential ingredient
Green bonds, therefore, represent a precious means by which the continent can plug the gap, and with demand for the product soaring and new issuers coming to the party thick and fast, the continent’s infrastructure shortfall looks soon to become a thing of the past. “Europe is faced with massive infrastructure needs and constrained public finances mean that several countries struggle to access finance”, says Olsen-Rong. “More private investments must be mobilised. At the same time, the EU’s strong climate goals mean that a big chunk of that infrastructure needs to be climate-resilient and low-carbon (rail, public transport instead of roads). Mobilising the largest capital market of all – the $100trn bonds market – will be essential to deliver green infrastructure.”
A booming green bond market has opened up a new avenue of finance in a time when many governments in the region are low on cash. However, the market does not rid European leaders of the enduring responsibilities they must face in the fight to mitigate climate change. And a growing interest in the market – if nothing else – should be taken as a sign that there is a willingness among investors to confront climate change where it matters most.