Fannie Mae last year sold $20bn of green bonds, making the US government-backed mortgage agency the world’s biggest issuer of environmentally labelled debt.
But this example is all too rare in this arena. Following a decade of growth, the rate of expansion in the green bond market slowed sharply in 2018, which has caused some observers to wonder whether the niche sector has begun to reach its limits.
Last year, $167bn of green bonds — debt issued with a promise to use the proceeds to do environmental good — were sold globally, according to rating agency Moody’s. This was up 6 per cent in 2017 but a far cry from previous years when double-digit growth was the norm.
Attention has turned to how the market can be expanded.
Several factors have been flagged as essential to further growth: these include encouraging institutions that have already dipped a toe into the market to make it a regular part of their capital-raising, and expanding the range of issuers. Another crucial factor is boosting investors’ confidence that green bonds raise additional finance for future projects and are not just relabelled debt that would have been sold anyway.
The green bond industry is going through its “difficult teenage years”, believes Rhys Petheram, co-manager of Jupiter Asset Management’s global ecology diversified fund. But, he adds, this period “will prove pivotal if [the market] is to fulfil its potential”.
Bringing the issuance of green bonds into the mainstream is “absolutely necessary”, argues Richard Sherry, director of alternative credit at fund manager M&G Investments. “We’re trying to finance a more sustainable economy and particularly trying to finance projects that help alleviate climate change. To do that we need investment at a massive scale; the green bond market at the moment is a drop in the ocean.”
Unlike Fannie Mae, most issuers to date have dabbled with the market just once and not returned.
So far, relatively highly rated entities in Europe and China — such as the owner of Amsterdam’s Schiphol airport, which raised €500m last year — have dominated the field.
Broadening the range of bonds across the risk spectrum is important so that investors can “build properly diversified portfolios”, Mr Sherry says. “In particular we’d like to see more BBB-rated corporates [and] more from the US and UK.”
One area of expansion being pioneered by Fannie Mae is securitisation. The mortgage behemoth’s green bonds are made up of repackaged loans on properties that meet various environmental criteria.
Banks around the world are sitting on many similar loan books, which they could bundle up as asset-backed securities and sell. But doing that requires work, says Natalie Mordi-Hillaert, an ESG (environmental, social, governance) and capital markets director at Bank of America Merrill Lynch.
“Fannie Mae already has the mortgages and the experience with securitisation, so by layering an energy efficiency programme on top of that, it was able to achieve a scalable and credible green bond programme,” she says.
“If we can come together and agree what an energy-efficient loan is [for other mortgage lenders], we can then start to replicate the scale of what Fannie Mae has done.”
There is scope for green securitisation with other types of consumer loans beyond housing, says Ms Mordi-Hillaert: “At some point there will be enough electric vehicles on the road that we can start to think about securitisation of auto loans.”
One attraction of securitisation for investors is that the loans have already been made. So, unlike conventional green bonds, which generally raise funds to finance future projects, investors can see exactly what the cash has been spent on — transparency about how their money is used is a key requirement for green bond investors.
Christa Clapp, director of research at Norway-based climate research institute Cicero, says that although it is important “that the environmental criteria are being applied all the way down to the underlying asset”, green securitisation is “definitely more tangible” for investors.
However that also raises eyebrows: most investors want to back projects that raise additional funds for environmental projects. If the money has already been spent, then a green bond’s claim to help to address the problem of climate change could be challenged.
This is part of a wider consideration for the whole green bond market: is it raising additional capital, or just giving a label to bonds that would have been sold anyway?
Mr Petheram says the industry faces a “worrying credibility gap” when it comes to the question of additionality, which could weigh on the market’s future growth.
He cites the telecoms industry, where several companies including Verizon and Telefónica have recently sold green-labelled debt to finance network upgrades — money that, in his view, would have been raised whether it had a green label or not.
Mr Petheram warns that, if the purpose of green bonds is to help expand environmentally sustainable investments, “it is destined to disappoint if market participants can’t match and demonstrate this ambition”.
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