2018 has been a year of consolidation for green, social, and sustainable bonds as sources of financing in capital markets, as their solid growth demonstrates. So far, the global market for these sustainable financial instruments has reached the equivalent of €71 million euros, according to Dealogic. In Spain alone, the volume of green bonds issued in 2018 has already exceeded the amount issued in 2017.
During 2017 green bonds reached a then unprecedented volume of $131 million, breaking issuance records. During its tenth anniversary, this green finance instrument saw an increase of 52 percent over the 2016 figure.
Experts forecast a solid consolidation of these sustainable financing products in the market as confirmed by the numbers for the first half of the year published by Dealogic. Looking at the geographic distribution of these instruments, Spain stands in fourth place – behind the U.S., France, and China – with a volume of €5.8 billion. Spain's issues have been led by Iberdrola (€1.45 billion), the regional government of Madrid (€1 billion), and BBVA (€1 billion).
What accounts for the strengthening of these green products? Their success is attributed to the gradual increase in the number of issuers and investors attracted to this market. It is worth pointing out that more sectors and geographical areas are joining this approach to sustainable financing.
Additionally, there have been a number of companies that have identified the environment as a market niche and have come forward to look for new methods of sustainable financing. It is important to note the role that energy companies like Iberdrola have played; in 2017 it had already issued bonds worth €2.75 billion.
BBVA sets the standard as an advisor in issuing green bonds
BBVA is one of the most experienced banks in Spain when it comes to providing customers guidance on green bonds, an activity it began in 2007 when it played a part in issuing the first green bond by the European Investment Bank. Since then BBVA has structured, provided guidance on, and acted as the placement entity for green bonds in Europe, the U.S., Mexico, and Latin America for companies, financial institutions, and the public sector.
It is worth noting the inaugural green bond issues that were led by BBVA during the first six months of 2018: for ACS SCE; the Basque government; Aguas Andinas; as well as the second green bond for ADIF AV; and the second sustainable bond of the regional government of Madrid. All these issues received an extraordinary welcome in the market and will be important examples to other issuers who want to join the market in the future.
This year has seen greater activity both by different sectors and in types of green and social bonds
Furthermore, this year has seen greater activity both by different sectors and in types of green and social bonds. By way of example, the Belgian Treasury made its debut in the market in February, following in the footsteps of countries like France and Poland. In the corporate sector, Danone broke ground with an inaugural social bond, while in the finance sector there were notable issues like the Australian bank ANZ's green bond aligned to the UN's SDGs or Bank of America Merrill Lynch’s green bond in USD.
Last May, BBVA also issued the largest green bond in the eurozone to date. This inaugural green bond (also tied to the UN's SDGs) represented that largest green bond issue from a financial institution in the eurozone.
The future of green bonds
In order for green bonds to grow exponentially, it is necessary to improve the monetary conditions as well as establish policies that incentivize green financing mechanisms, as was mentioned in the ‘BBVA Sustainable Finance Forum’ held last May in Madrid. It is thus hoped that the European Commission will begin to publish the first installments of regulations that will define the future of sustainable finance in Europe. Furthermore, according to comments made in different round table discussions, international investors would reject green bonds having a lower return merely due to the “green” label, arguing that the corporate risk of repayment remains the same.
Looking to 2018, the forecast points to an increase of 25-40 percent in the global green bond market. We therefore estimate that the year will end with a volume of $175 billion issued, representing 30 percent growth over 2017 figures, right in line with the growth observed in the first half of 2018.
*Julian Romero, Head of the Sustainable Bond Group in BBVA’s lending department