A look at why we believe 2019 will be green

We have witnessed astronomical growth in the green bond market since the launch of the first ‘Climate Awareness Bond’ in 2007, and, since 2015, have seen the number of issuances almost double every year.

Going into 2018, this momentum was anticipated to continue, yet the reality was quite different, with issuance falling short of the Climate Bond Initiative’s (CBI) estimation last year. However, we maintain that there is more to the story and there are reasons to remain optimistic about the future of green bonds.

Putting it into perspective

Last year was a tough year all round for markets. Support from central banks began to dwindle, with the European Central Bank announcing it would end its quantitative easing programme, and the Federal Reserve implementing four interest rate hikes.

This, coupled with unstable geopolitical tensions resulting from ongoing Brexit negotiations, trade wars and political uncertainty in Italy, weighted on risk appetite and triggered historically large fund outflows from most asset classes. In this context, global supply sharply decreased compared to previous years, and overall support for primary new issuances fell.

It’s not all doom and gloom

It’s not all bad news. Compared with 2017, green bond issuance were stable last year and bid to cover remained quite high, showcasing the demand for this asset class, even in turbulent markets. Furthermore, new issuers increased by 45%* over the course of 2018, and, among these, were new sovereign issuers including Indonesia, Ireland, Belgium. Furthermore, along with sovereign issuers, last year saw 23% of new issuances coming from the financial sector, up by more than 60% compared to 2017*.

The biggest disappointment over the year came from corporate sector activity. Issuance decreased by 10%* over the year, highlighting that many existing green issuers did not return to the market. However, it is important to keep in mind that building a green framework is costly and time-consuming, and issuers that overcame this first challenge are likely to continue issuing green bonds.

What does 2019 have in store?

New year, new opportunities. We believe 2019 could see new sovereign issuers such as the Netherlands join the green bond market, and this combined with many new corporate sector opportunities such as automobiles or telecommunications, could provide a strong driver for growth this year.

Green bond frameworks are improving, with issuers providing stronger reporting and greater transparency regarding their management of proceeds.

We recognise that there is still more work to be done in creating an international standard for green bonds, however, we believe that the market is moving in the right direction. A European green bond standard is widely expected this year, which could help make this universe more accessible, and could make it easier for new green bond issuers.

Conclusion: 2019 will be green

Although 2018 may have fallen short of investor’s expectations, we maintain that there are reasons to remain positive about the growth of the green bond market. The market has reached $240bn* and is now offering greater diversification in terms of region and sectors with less concentration issues.

The universe now is more capable of absorbing new issuances without creating distortions as its risk/return profile is becoming more stable and is now quite similar to the global conventional universe.

Fundamentally, as climate awareness continues to gain momentum, we can be confident that 2019 will be green, and that this year’s coming issuance could outpace those of the previous years.

* Source: Ice BofA ML Green bond index as at 31/12/2018

 

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