Green Bonds – still the tip of the iceberg


Gail Counihan, Responsible Investment Analyst

15 February 2018

It’s been a little more than four months since we last shared our views on green bonds – and as expected, November and December both proved to be record-breaking months for the sector.  We saw the first Swiss Franc issue, the first sovereign green bond from a developing country – Fiji – and a good mix of corporate issuances. There is a healthy amount of diversification into new currencies, sectors and geographies - and we think this is still the tip of the iceberg. Not only does this market remain small relative to both the total debt market and to the amount of infrastructure investment required in order to “meet the climate challenge,” there continues to be strong evidence that labelled green bonds remain relatively inexpensive for issuers. 
Internally, we continue to consider the optimal level of participation in the labelled green bond market to optimize our clients’ risk adjusted returns. While we remain supportive of financing the transition to a low-carbon future, we remain convinced that we can access better risk-adjusted returns for our clients by applying our bespoke analysis to the unlabelled green bond market – and recent research by Karpf and Mandel supports this view. 
To support our bespoke analysis, we have reviewed the processes of select green bond ‘Second Opinion’ providers – companies who specialise in issuing comprehensive opinions and assurance around the environmental credentials of the projects within each green bond issue. It is important to us that our own, internal opinion on the “greenness” of the project represents best practice. We know that the transition to a lower-carbon economy will require both tactical and strategic architecture. Accordingly, we need to be able to appropriately assess projects ranging from short-term efficiency improvements to fossil fuel infrastructure, to ground source heat pump – zero emissions infrastructure with a design life of over 100 years. Our internal analysis looks at each issuer and project on their own merits, the environmental credentials of the asset, our security as a lender, the longevity of the asset, and the governance of the entity or company. Given the fungible nature of cash, we think it is impossible to appraise these assets without forming a holistic view of the asset and issuing entity.  
The growth rate of this market is encouraging and we think that by benchmarking our internal analysis to leading ‘Second Opinion’ providers and keeping an open dialogue with issuers, we will play our part to ensure that standards of “greenness” are upheld across the market – whether the issuer chooses to be labelled ‘Green’ or not. Ensuring that our internal analysis is robust and represents best practice will mean that we can finance projects that are genuinely supportive of the move to a lower-carbon economy without sacrificing returns.

It’s been a little more than four months since we last shared our views on green bonds – and as expected, November and December both proved to be record-breaking months for the sector.  We saw the first Swiss Franc issue, the first sovereign green bond from a developing country – Fiji – and a good mix of corporate issuances. There is a healthy amount of diversification into new currencies, sectors and geographies - and we think this is still the tip of the iceberg. Not only does this market remain small relative to both the total debt market and to the amount of infrastructure investment required in order to “meet the climate challenge,” there continues to be strong evidence that labelled green bonds remain relatively inexpensive for issuers. 

Internally, we continue to consider the optimal level of participation in the labelled green bond market to optimize our clients’ risk adjusted returns. While we remain supportive of financing the transition to a low-carbon future, we remain convinced that we can access better risk-adjusted returns for our clients by applying our bespoke analysis to the unlabelled green bond market – and recent research by Karpf and Mandel supports this view. 

To support our bespoke analysis, we have reviewed the processes of select green bond ‘Second Opinion’ providers – companies who specialise in issuing comprehensive opinions and assurance around the environmental credentials of the projects within each green bond issue. It is important to us that our own, internal opinion on the “greenness” of the project represents best practice. We know that the transition to a lower-carbon economy will require both tactical and strategic architecture. Accordingly, we need to be able to appropriately assess projects ranging from short-term efficiency improvements to fossil fuel infrastructure, to ground source heat pump – zero emissions infrastructure with a design life of over 100 years. Our internal analysis looks at each issuer and project on their own merits, the environmental credentials of the asset, our security as a lender, the longevity of the asset, and the governance of the entity or company. Given the fungible nature of cash, we think it is impossible to appraise these assets without forming a holistic view of the asset and issuing entity.  

The growth rate of this market is encouraging and we think that by benchmarking our internal analysis to leading ‘Second Opinion’ providers and keeping an open dialogue with issuers, we will play our part to ensure that standards of “greenness” are upheld across the market – whether the issuer chooses to be labelled ‘Green’ or not. Ensuring that our internal analysis is robust and represents best practice will mean that we can finance projects that are genuinely supportive of the move to a lower-carbon economy without sacrificing returns.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. RLAM is not responsible for content on third party websites.