In an environment where companies are becoming increasingly aware about the importance of sustainability, green bonds are taking hold as a funding alternative: In 2016 global green bond issues reached $87 billion, a record level after closing at $42 billion in 2015.
Green bonds are debt securities issued by public or private institutions to fund green and sustainable projects. Green bond issues allow companies to diversify and expand their investor base, set themselves apart from their market competitors and improve their corporate image and reputation.
Several factors have contributed to the boom of the green bond market in the past years, especially in 2016.
New corporate and financial issuers
A key factor has been the growing participation of new corporate issuers and the financial sector, both in Europe and America, although it was China that reported higher activity growth rates.
Companies in the public utility sector with a sizeable renewable business - such as EDF, Iberdrola and TenneT – solidified their standing as the most active names in this market, but there are also other sectors, like real estate, which have also made notable contributions.
In terms of volume, virtually 80% of the green bonds issued in 2016 were issued by corporations and financial institutions, while the supranational organizations were responsible for the remaining 20%.
As regards demand, appetite for this type of assets among institutional investors (fund and pension managers) continued growing and expanded geographically with new interests in emerging economies. We are therefore also talking about an buoyant market that will play a very relevant role in funding financing the transition towards a clean energy and low emissions scenario in emerging economies, which will ultimately foster sustainable development.
Windmills in Chile.
More geographical and currency diversification
Although issues denominated in euros an U.S. dollars accounted approximately for 65% of the market in 2016, issues in China, denominated in the local currency – CNY –, skyrocketed during the period, and now represent 30% of the total volume issued. This growth was mainly due to the large transactions carried out by Chinese financial institutions, such as the Bank of Communications’ debt issue, a green bond valued $4400, the largest operation to date.
Another aspect worth noting was the inaugural issuances in domestic markets and local currency in Latin America. In Mexico, Nacional Financiera issued this year a green bond, structured and placed by BBVA, intended to fund the construction of wind and hydroelectric power plants. Also, the City of Mexico issued a bond to fund green projects in Mexico City, mainly related to transport, the efficient use of water and other adaptation projects aimed at improving the city’s standing in terms of sustainability and contribution to fighting climate change. In Colombia, Bancolombia completed a bond issue to support “green” buildings and other projects with positive climate implications.
Also noteworthy was the first government issue in 2016. The Republic of Poland issued a green bond worth €750 million in what could be seen as a statement of principles by one of, until now, more oil-reliant economies.
Green bond issues in Spain
In Spain, the market was led by notable issues in the corporate sector. Besides Iberdrola, which already pioneered the green bond market in 2014, in 2016 Acciona issued two different green formats, a loan-bond hybrid (subject to German laws) and a €22 million 15-year bond, the longest maturity to date (placed by BBVA) to fund a renewable energy project.
In the financial sector, Caja Rural de Navarrra debuted in the market with a €500 million 7-year maturity sustainable bond which earned a great reception from northern European investors. This sustainable issue seeks to fund social and environmental projects in the regions in which the Savings Bank engages. BBVA, Banco Cooperativo, Barclays and Credit Agricole CIB acting as bookrunners.
Regarding issuers in the Spanish public sector, in 2016 the Official Credit Institute (ICO) successfully completed the issue of its second social bond after debuting in 2015), totaling €500 million. Social bonds have adapted the principles that self-regulate green bonds to fund projects with a clear social impact.
BBVA solidified its position as the most active Spanish financial institution in the origination and placement of green bonds in 2016, and was involved in the most relevant issues in Spain. The bank acted as Lead Manager in Acciona Green Bond Private Placement, Iberdrola 3rd Green Bond, EDF 2026 Green Bond, Mexico City Airport, Nacional Financiera, ICO 2nd Social Bond and Caja Rural de Navarra Sustainable Covered Bond.
New International Mexico City Airport.
The outlook for 2017
2017 marks the 10th anniversary of the green bond market, with very positive growth prospects.. According to BBVA estimates, the total volume of green bond issues will be in the €120 - €150 billion range in 2017, a year that got off to a very active start, as evidenced by the French Republic’s issue: This is the second green sovereign bond issue after Poland’s, and the most valuable to date (€7 billion).
This year it will be worth keeping a close eye on Spanish companies with access to the fixed-income market. It is quite revealing to see how active issuers reprise past experiences and emphasize the added benefits they reap.