Although the European green taxonomy is still in the development phase, green bond issuance has seen solid momentum in recent years. The sector represents a liquid and diversified market which constitutes a tool for investors whose objective is to reconcile positive impact and financial return. An update on the green bonds trends.

Solutions for climate change in sectors such as energy, construction, transport, water, waste management, land use or industry, the accelerating road-map of the Green Deal, offers a prominent place for green bonds in the financing of the assets necessary for the transition to a carbon-free economy.

Launched in 2007, the green bond market currently represents around 700 billion euros in assets, with a record of 258.9 billion dollars of new issuances in 2019 (versus 171.2 billion dollars in 2018) according to the Climate Bond Initiative study (CBI).

1,802 transactions were thus carried out over 2019, i.e. nearly 13% more than in 2018, and 45% more issuers, that is to say 506 issuers in 2019, versus 347 in 2018.

In these issuers, there are 8 new countries (Barbados, Ecuador, Greece, Kenya, Panama, Russia, Saudi Arabia, Ukraine) with a combined issue of 3.1 billion dollars bringing the total number of issuing countries of green bonds to 62 (excluding supranationals) and 291 new issuers.

Main issuers

The 291 issuers of green bonds (which had not issued before 2019) accounted for 88 billion dollars in issuance, or 34% of the global market in 2019 and the main player of these issuers was the Dutch State Treasury Agency, which issued the first sovereign Dutch green bond, Climate Bonds certified for a value of 6.7 billion dollars intended to finance renewable energies, energy efficiency of buildings, transport and water infrastructure.

The other part, 66% of 2019 volume corresponds to 171 billion dollars issued by the 215 original issuers (issued before 2019). This volume was evenly distributed among the types of issuers: financial companies (19%), non-financial (18%) government-backed entities (17%), asset-backed securities (15%) and development banks. (14%). Sovereign issues contributed to 9%, largely due to the fact that France reissued its green OAT three times during the year.

According to Agence France Trésor (AFT), “the total amount of issues in 2020, after the auction on July 2, 2020, amounts 6.7 billion euros. The outstanding amount of the green OAT stands at 27.4 billion euros. “

The 2 financing French projects are SNCF including nine contracts of 4 billion dollars, for various railway projects, including maintenance, modernization and energy efficiency, as well as new railway lines and extensions of existing lines (for passengers and freight).

And the Société du Grand Paris for six operations worth $ 3.6 billion, to finance rail and metro extensions around Paris, including 200km of new metro lines, 68 metro stations and 7 ancillary technical centers. The entire project is funded through green bonds, with programmatic certification.

Let’s note beyond our borders the Noor Energy 1 project in Dubai, in the United Arab Emirates, the first certified agreement in the Middle East for an amount of 2.7 billion dollars, which will allow the development of a hybrid solar project of 950 MW in south of Dubai.

After Belgium, which stood out as the most frequent sovereign issuer, with 2.4 billion euros, it is now Germany which has announced that it will issue for the first time around 11 billion euros of federal ecological bonds by the end of the year.

“German government securities are the benchmark for interest rates in the euro zone. We want to continue along this path and make a substantial contribution in the new green market segment ”

Olaf Scholz and Svenja Schulze, respectively minister of Finances and of Environment – Source AGEFI

Transaction dimension

The conspicuous increase in average transaction size appears to be the trend in the green bond market, from 108 million dollars in 2018 to 144 million dollars in 2019.

They thus provide more liquidity and depth to the market by attracting more investors and integrating green bonds into broad market indices, while allocating more funds to green projects from a single issue.

The vast majority of these have been issued by sovereign states, predominantly Chinese financial firms (which raised $ 34.3 billion), national and supranational development banks, and large government-backed entities (particularly European).

According to the Emerging Market Green Bond Report, issuance of green bonds in emerging country markets raised to 52 billion dollars in 2019, corresponding to 21% increase from the 2018 performance. In Africa, South Africa was the major issuing country of green bonds in 2019 with the mobilization of 724.2 million dollars, followed by Nigeria (106.3 million dollars) and Kenya (41.5 millions dollars).

However, a strong base of smaller issuers is also positive, demonstrating that the market is a source of capital for a variety of issuer profiles, including those with lower funding needs; as is often the case, diversity is a sign of resilience.

Emission sectors

Water, waste and land use experience more moderate growth in green emissions than transport, energy and construction. Even though green bonds issued for solutions in the water sector represent only 18%, the theme has become the fourth most important category. Waste (+ 17%) and land use (+ 17%) have continued to grow steadily in recent years but have not yet reached 10 billion dollars in annual volume.

The sustainable development goal – SDG 14 – dedicated to the oceans, however, receives the least investment in the world among all the SDGs. Funding for sustainable marine projects, although it has increased significantly in recent years, is still overshadowed by other types of projects.

According to the Climate Bonds Green Bond database, at the end of 2019 there were only 50 transactions from 32 issuers to fund blue projects, most of them related to offshore wind and / or also various types of onshore projects.

The future of green bonds

Europe continues to develop a taxonomy of sustainable activities which represents one of the most significant major advances in the field of sustainable finance, the aim of which is to serve as an international benchmark.

The gradual rise of a broader range of durable bonds (durable bonds, social bonds) and credit linked to ESG, is giving rise to a growing debate on how to enable the transition in various key sectors. Because, while green bonds have made it possible to attract considerable additional investment, many “decarbonization” opportunities are not eligible for these green bonds. Thus, the “transition bond” or transition bond, are a new class of assets intended for industries with high greenhouse gas emissions (GHG).

They are also referring to “brown” bonds – the purpose of which is to help the issuer switch to greener business activities. These bonds differ from green bonds and are designed only for “green industries”, ie industries already on the way to reducing their GHG emissions, such as renewables. Brown industries, on the other hand, will be able, with the right incentives, to take active steps to become more sustainable tomorrow.

However, it will take more than just colors to firmly anchor these bonds in sustainable finance. And for this, we are still waiting for the publication of the green taxonomy text at the end of 2020, with an adoption of the objectives scheduled for the end of 2022.

Article: Joana Foglia