More global giants are investing in new initiatives to combat climate change
IN MAY, utility company GDF Suez issued a green bond worth 2.5 billion euro, to support its ambitious development strategy in renewable energies and energy efficiency. The amount was close to a third of the total 7.6 billion euro ($10.4 billion) of corporate green issuance since November last year.
“This unusually large issue will serve the strategic priorities and sustainable growth strategy of GDF SUEZ in renewables and energy efficiency in Europe and throughout the world,” said GDF SUEZ Chairman and CEO Gerard Mestrallet. “Projects financed by this bond issue will enable the group to address the great energy and environmental challenges we face: meeting energy needs, ensuring security of supply, combating climate change, and optimising natural resources.”
In March, Toyota Financial Services issued what it claims is the first “Green Bond” in the auto finance industry. Making it “green” means, according to Toyota’s captive finance company, that the proceeds would be used exclusively to fund consumer loans and leases for “green” vehicles. including hybrids like the Toyota Prius.
In the same month, Unilever also issued green bonds worth 250 million pounds, which will be invested in a number of projects including: a laundry liquid detergent factory in Johannesburg; a laundry powder facility in China; a home and personal care factory in Turkey; an ice-cream factory in Johannesburg; the expansion of a spreads factory in Kansas; and the “Lean & Green Freezer” cabinets project in Turkey, Russia and the US.
“We have a clearly defined ambition in Unilever, articulated by our sustainable living plan. By issuing our first Green Sustainability Bond, our intention is to invite investors to support our vision for sustainable growth, while investing in the Unilever credit,” said Jean Marc Huet, Unilever’s Chief Financial Officer.
Global companies are rushing to issue “green” bonds to finance their environmental-friendly projects. Green bonds are becoming a source of capital, driven by both the needs of corporates, as well as the desire by investors to allocate capital to socially responsible and environmentally sustainable investments. The aim for both issuers and investors alike is to develop a large and liquid market in order to reduce transaction and investment costs.
For example, GDF Suez’s bond was 3-times oversubscribed and very successful with French, German and UK institutional investors. Strong demand came from investors focused on environmental and socially responsible investing who bought 64 per cent of the issue.
The Climate Bonds Initiative (CBI), a non-profit organisation that promotes investments to combat climate change, predicts total green bond issuance from all sectors will reach $40 billion in 2014.
Standard & Poor’s Ratings Services estimated that the corporate green bond market as of May was worth US$10.4 billion and expected this to grow further to $20 billion at the end of this year which would double the size in 2013. So far, corporate green bonds have mostly been issued in Europe, generally with investment-grade ratings of ‘A+’ or ‘A’,” it said.
“In our view, corporate green bond issuance is accelerating not only because this aids diversification of investor pools for issuers, but also because of investors’ growing interest in implementing environmental, social, and governance goals. Entry into this expanding market is enabling corporates to tap an additional pool of investors who are committed to principles of socially responsible investing. In our view, corporate issuance is likely to accelerate not only because this aids diversification of investor pools, but because of investors’ growing intention to implement environmental, social, and governance (ESG) targets initiated by the United Nations Principles for Responsible Investment (PRI),” the rating agency said.
As of April 2013, the 1,188 investors who had signed up for the PRI represented approximately $34 trillion of assets under management (AUM). In addition, the PRI has encouraged 30 stock exchanges to enhance ESG disclosures among their listed companies.
Crucially for investors, the credit risk of a corporate green bond remains on the issuer’s balance sheet. This means that, unlike with multilateral bank issuance, investors do not have to sacrifice yield to gain green exposure, nor significantly increase their risk profile in order to invest in assets that aid environmental efforts. This can satisfy investors’ requirements for yield, while safeguarding their reputation for socially responsible investing. Investors are also likely to examine an issuer’s environmental track record and reporting standards alongside participation in such initiatives, increasing the need for rigorous disclosure in offerings. Investors in green bonds also want assurance that the proceeds are being used to enable environmentally sustainable outcomes.
Issuance to date has come from a number of industries, but has been led by utilities companies, which represent 62.5 per cent.
“In the future, we expect corporate green bonds could be issued by a variety of industry groups, and will likely be concentrated in industries that are considered lower-risk, are already experiencing good growth, and where upfront costs tend to be smaller,” S&P said. “With corporate green bonds, the credit risk for the investor remains linked to the issuer’s general corporate creditworthiness, with bond proceeds typically being earmarked for environmental purposes. Environment-related projects tend to have high upfront capital expenditure, low maintenance costs, and, if backed by government subsidies, relatively stable revenue streams.”
Corporate green bonds are a new investment initiative, aside from those issued by international organisations. In 2008, the World Bank launched the “Strategic Framework for Development and Climate Change” to help stimulate and coordinate public and private sector activity to combat climate change and the World Bank Green Bonds were part of it. Funds are being raised from fixed income investors to support global projects that seek to mitigate climate change or help affected people adapt to it. Since 2008, the World Bank has now raised $6.4 billion through 67 transactions and 17 currencies.
A part of the proceeds go to China’s Beijing Rooftop Solar Photovoltaic Scale-Up (Sunshine Schools) Project, which aims to increase the share of clean energy in electricity consumption and to demonstrate the viability of the renewable energy service company model for scaling up the deployment of rooftop solar photovoltaic systems. Another recipient is Indonesia’s Geothermal Energy project, as the country needs to increase power generation from renewable geothermal resources and reduce emissions of carbon dioxide.