Morning, have you ever wanted to become an ethical investor? HNFC have found tool just for you the "Green Bonds" . Green bonds what are those?
After realising that we are the cause for global warming, the humanity had to take its responsibility. The Paris agreement is the first step toward an environmental regulation applied globally. It is a written document by every country explaining roughly that every country should lower their carbon emission and other pollutant activities and encourage the creation of “green activities”.
However, the loss of the USA with the decision of Trump to step out shows that this kind of regulation is not unanimously approved. There are still governments and corporations denying the humanity’s responsibility for the global warming. They cannot prove this position with scientific evidences as they only motivated by financial gains. The system works well for them currently. There are no short-terms reasons to make a change.
To conciliate both side, HNFC would like to present you “Green Bonds”.
Green Bonds: What are those?
Green Bonds are recent financial instruments with little history. The first green bond was emitted in 2007 by the European Investment Bank and the World Bank. Hence, there is currently no definition which suits perfectly the term “Green Bond” (and moreover “Green” in the financial sector).
There are two ways of looking at a Green Bond: financially and strategically.
Financially, a Green Bond is like all other bonds available on the fixed-income market except the fact that they finance only green, sustainable and clean activities.
Strategically the best definition comes from Manuel Lewin (Head of Responsible Investment at Zurich Insurance): “Green Bonds are a tool for corporate issuers that want to communicate how they are thinking strategically about climate change and whether they are investing to capitalise on the opportunities it represents”.
So, a Green Bond has two roles: financing green investments and promoting your brand reputation.
Of course some institutions would seek to use this green brand in a bad way (by emitting Green Bonds which would eventually finance “classic” activities or worst… pollutant). This is why some principles had to be written. To decide if a bond is green or not, the ICMA (International Capital Market Association) launched the “Green Bond principles”. The aim of this text is to define clearly what is green and what is not, in order to avoid cases as mentioned above. These texts ask transparency on the financed activity to promote confidence on the Green bond market.
Green Bonds finance different types of projects. In 2016, the first use of Green Bonds was for energy. It seems obvious that such financial instruments should finance first projects to create cleaner energies. However other sectors are concerned: waste management, water, transport, building… Thus, there are wide range of applications.
Green Bonds: Who leads the movement?
Despite their young age, Green Bonds attract more and more investors, institutions and states. Some leaders are even emerging.
The first is China. The country came late in the industry but has used it far more consequently than everyone else. In 2016, Chinese companies issued a total amount of 36 billions of dollars in Green Bonds (representing 39 percent of the market). It is only the beginning as the Bank of China predicts an annual investment of $320 billions for China (only 15 percent of this sum will be paid by the state). This Chinese decision is explained by the country exposure to environmental changes: China is very exposed to climate risk. More than just an ethical realization, it is firstly an investment to protect itself.
Financial institutions also begin to pay attention to the green market. The financial sector saw some indices appearing on the market. Also, rating agencies created notices and procedures to evaluate a Green Bond. Finally, the Luxembourg SE developed and launched a Green Exchange platform dedicated to Green Bonds trading. This looks like the beginning of a new market!
In addition, Green Sovereign Bonds are making their entry. Poland is the first country ever to issue Green Sovereign Bonds. France also issued 8.3 billions of Dollars in last January. Beside the political aspect of representing the Paris Agreement and hence showing example, there is a financial objective for those states. Those Bonds will be useful to enlarge the investors’ base of the state and especially attracting those with a green purpose.
States have to meet some criteria in terms of pollution diminution and green activities promotion. Thus they are under pressure in a way. However, they don’t have the capital to answer well to all of those requirements. So, they need help from private investors to succeed at this task.
(n.b: Green Sovereign Bonds also help the Green Bond market to be more liquid as there is currently more demand than offer. This difference could be a real problem for the market growth).
Green Bonds: Why is there so much enthusiasm?
In just a decade, the humanity realized that green is not an option, it is a duty. Nevertheless, the overall enthusiasm around this sector is not only motivated by going green. There are financial expectations as well.
Indeed, a lot of analysis claim that we are late on the Green investment schedule and we should expect an exponential growth of Green Bonds issuance. An equity strategist of Bank of America Merrill Lynch explains that there is a gap between $ 650 Billion and $ 860 Billion annually to meet the 2030 financial objectives for the climate. With this analysis in mind, we can assess that we have to invest Trillions in the next decades to save the world.
The trend is already set. In 2013, Green Bonds represented $11 billion. This same figure was $93 billion in 2016. Bloomberg predicts Green Bonds to go to $123 billion in 2017. Moody’s sees things bigger with $206 billion.
So, the market is growing and that’s a good sign for me and my children’s life.
The problem is: how to bring enough money to buy these bonds?
The good news is: we never had so much capital available. In the financial history, 2017 is the era with the most capital for investment making. As the bond market is suffering from low rate, investing in Green Bonds represents one of the few alternatives to classic corporate or sovereign bonds.
So we may have a solution to solve both the financing of green activities and the allocation of the capital available.
The trend is here. The politicians (most of them) are supporting the idea. The market is emerging. And little by little, the evolution to a green society seems to occur.
Hence, every signals are green (with no bad jokes): Green Bonds are clear to take-off.
“Going green makes both environmental and financial sense” as it is written in the World Finance, Edition of Fall 2017.
Sources: World Finance, Fall 2017
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Written by Samuel Chaineau│Co-founder of HNFC
Edited and Corrected
by Vee Venski
This article is not a promotion of financial investment. Investing money in financial instruments is risk-reward process. Losses and gains are part of financial investment process. Only invest money you can afford to lose.