Banker tips $10bn green bond market, but urges framework clarity

21 October 2010
The value of environmental bond issuance could reach $10 billion by the end of next year, a developer of green financial products said, but warned a clear and transparent framework is necessary to foster the growth of the asset class.


Christopher Flensborg, head of sustainable products development at Sweden’s SEB Merchant Bank – which has acted as lead manager for around $1.5 billion of the total $4 billion green bonds issued to date – said many potential investors have a “strong commitment” to environmental bonds but lack the tools to implement their investment.

Environmental bonds (also know as green or climate bonds) direct revenues raised towards ‘green’ investments, or link their coupon payments to an environmental index. For example, the Asian Development Bank issued its first clean energy bond last month, following the success of a water bond issue in February.

“There’s still a lot of work to be done to make allocations possible for investment managers,” Flensborg told an Environmental Finance webinar on Friday.

“Either the tools have to be created inside the existing framework – alternatively, the framework has to be changed.”

While most environmental bonds are issued in exactly the same way as conventional bonds, they require additional due diligence around their environmental aspects.

Flensborg said while the market has yet to reach critical mass, he is buoyed by growing interest and expects the issuance will hit $10 billion by the end of 2011.

While interest in environmental bonds is growing, he said many fund managers currently lack a mandate from clients to invest.

A number of factors will be important in boosting the attractiveness of green bonds, he said, including standardisation and transparency in how their proceeds are used, in order that investors can demonstrate a clear environmental benefit to stakeholders.

Due to a lack of the expertise required to assess green bonds’ environmental credentials in many institutions, he said it is preferable for environmental bonds to come ‘pre-packaged’, with a third party performing the environmental screening, monitoring and reporting.

And simply being green is not enough, he said, arguing that environmental bonds must provide a comparable or higher return than conventional bonds.

Also speaking on the webinar, Sean Kidney, chairman of the Climate Bonds Initiative, emphasised the role of public and private sector engagement to foster the growth of green bonds. He said there is “an enormous gulf” in understanding between institutional investors and governments about how they can successfully work together.

Kidney said there is “clearly not enough product at scale” with no environmental bond issuances in the $500 million-$1 billion range that is attractive to many issuers.

“We need, from a policy perspective, to be growing that kind of investment option for institutional investors very quickly,” he said.

While there is an investor bias toward green-themed products, Kidney said investors are not prepared to pay a premium. He also warned that product developers must be sure of the credibility of any instruments offered.

Renewable energy and energy efficiency are the two key areas for investment in environmental bonds, he said, noting their potential in agriculture and land use.

Charlotte Dudley