Companies are increasingly prioritising Environmental, Sustainable & Governance (ESG) projects to deal with the risks and opportunities facing their businesses. Issuing a green bond to finance these projects represents a visible commitment to ESG principles. Investors have a large appetite for green bonds (as they integrate sustainable and impact investing criteria into their portfolios) and this can sometimes mean lower borrowing costs for a green bond issuer, and subsequently a lower return for investors.
Richard Kelly, partner in finance and capital markets department, Matheson, defines green bonds as any type of bond instrument where the proceeds will be exclusively applied to finance or refinance eligible green projects. There are numerous voluntary standards that define what constitutes an eligible "green" project, but the most widely used is the Green Bond Principles (GBP) published by the International Capital Markets Association (ICMA) (used by approximately 98 per cent of the green bond market).
“The EU is also passing legislation which provides additional guidance on what constitutes a ‘green’ investment. The EU’s Taxonomy Regulation provides a classification system for establishing a list of environmentally sustainable economic activities, and the EU’s recently proposed ‘EU Green Bond Standard’ will provide an EU Taxonomy-aligned voluntary standard for green bond issuers,” says Kelly.
Conor Holland, director, ESG, KPMG in Ireland, points to the increasing popularity of green bonds.
“They are becoming more popular as investors demand socially responsible investment opportunities and have expressed a strong appetite for green bonds. While retail investors demand sustainable investments from brokers and fund managers, institutional investors (e.g. pension asset managers) are using green bonds to address ESG mandates.
“Additionally, central banks are driving sustainable finance which is intrinsically linked to green bonds,” says Holland.
Milestone
Definitions of what counts as “green” have in the past varied. The EU green bond standard is a significant milestone in bringing a uniform definition of green bonds to market participants.
“Green bonds, however, ensure that refinancing occurs in a manner that is directly linked to the issuer’s sustainability objectives and highlights them to all stakeholders. Projects that are being refinanced through green bonds are presented with full transparency and benchmarked against green definitions and taxonomies with the input of external reviews,” says Holland.
“The reliable clarification permits the issuer to explain how their use of proceeds contributes to sustainability and permits investors to assess and monitor the development of the green component over time, creating a positive incentive to change.
“This does not occur with other types of mainstream debt finance. Refinancing also of course makes additional funds available that can be reinvested into new green projects or to finance an issuer’s overall transition strategy. These projects can be in turn refinanced by new green bonds and so on,” says Holland.
Andy Murphy, managing director in structured finance company Waystone, outlines that green bonds may not deliver as high a return initially, but tax breaks and other incentives can make up the shortfall.
“If you look at a green bond, it’s probably going to have a lower rate of return. But given that everyone wants or needs a green bond and an ESG investment within their portfolio going forward, there’s more competition to actually lend to these products or to buy these kinds of products.
“If there’s a lot of competition that means that the issuer of the green bond can set the price. If the green bond is oversubscribed it means that they can effectively choose the ambassadors, their preferred investors as well. Generally, I would say the return of a green bond is not as attractive. However, there are tax incentives as well and tax breaks for buying green bonds.”
Premium
Grit Young, strategy and transactions partner at EY, believes that investors should be prepared to take a lower yield.
“If you buy something from a sustainable supply chain you normally pay a premium for that. However, over the last 15 or so years people have made green investments and actually they’ve been very profitable. But that’s probably also a reflection of the world slowly but surely waking up to climate change.”
She also argues for government to be more robust in their regulations.
“If we don’t police green bonds then we’re going to invest in projects that are not worth investing in, and we would have wasted that wealth. And if climate science doesn’t progress quickly enough, and that doesn’t get fed back down to the people who are investing or the issuers, who in turn invest in projects, then again we will have wasted precious opportunities to invest in what really matters.”
Regulations are making an impact but what about people?
Mark Jordan, chief technologist at Skillnet Ireland, is involved in upskilling and training people in Irish SMEs. The education is as varied as a half day webinar to a PhD programme on data analytics, and his clients range from a farmer looking to implement green agritech all to way up to tech giants such as Dell.
“We are supporting almost 20,000 companies and training their staff. It’s people that create these instruments and people that purchase them. Our work concentrates on Irish employees and is assisted with European subsidies.”
In addition to green bonds there are also substantial growing markets for social bonds – where the proceeds are applied to social projects like affordable housing, sustainable food systems and agriculture, infrastructure, and dealing with the consequences of Covid-19 – and sustainability bonds, where the proceeds are applied to both green and social projects. It’s an expanding market.