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Green Bonds: A Synopsis

By David Katimbo- Mugwanya
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Companies routinely issue corporate bonds to raise funds for “general corporate purposes” - a catchall phrase used to incorporate a wide-ranging scope of business activities. How different is a Green bond issued by the same company, one may ponder? Green bonds are for a more specific funding purpose, with bond prospectuses typically stipulating that the proceeds obtained from their issuance be allocated solely towards projects deemed “green”.

Green? – Green projects, as pertaining to a corporate company, are those whose ultimate objective is to reduce the environmental impact of its day-to-day operations and or enhance its resource efficiency.  Below is a sample of three organisations that have sold Green bonds in the recent past, noting how proceeds of their sales have been deployed.

European Investment Bank (EIB) – issues Climate Awareness / Green bonds in multiple currencies to fund developments in the fields of renewable energy and energy efficiency. These may include projects such as wind, hydro, solar, geothermal energy generation as well as building insulation, energy loss reduction and the replacement of equipment to attain efficiency enhancements. The EIB is the EU’s non-profit lending institution, owned by European member states and has issued approximately $9.5 billion in Green bonds to-date.

Unilever – sold the first Green bond for a Consumer Goods company in 2014, raising £250 million which has largely gone towards projects that improve Unilever’s eco-efficiency. These have included new factories with features such as rainwater harvesting, water recycling, heat recovery from steam and refrigeration systems as well as the purchase of ice cream freezer cabinets that use natural hydrocarbon refrigerants.

Transport for London (TfL) – raised £400 million in the spring of 2015, for its inaugural green bond, to aid the implementation of its Corporate Environment Framework. The environmental areas that TfL intends to tackle with the funding provided by this debt include; air quality, carbon, noise, pollution prevention and resource management. For instance, TfL will be purchasing low emission and low CO2 buses in addition to retrofitting catalytic converters on its existing fleet in order to reduce their NOx emissions.

Facts – The first Green bonds were issued by the World Bank and EIB in 2007. This market has mushroomed, with approximately $100 billion having been issued between the start of 2007 and the end of January 2016.

green bond graph

The issuer base of Green bonds has also broadened from the pioneer Supra-nationals to Corporates, Government agencies, Banks as well as Municipal Governments. Of the outstanding issues, US dollar and Euro-denominated bonds form the majority, currently accounting for just below 80% of the entire market.

Investment environment – Recent developments such as the COP21 Paris climate change pact, a legally binding international agreement to keep global warming beneath 2⁰C, will arguably lend support to further green bond issuance. The investment performance of the asset class has also been noteworthy, as credit spreads trade in-line with outstanding non-Green debt by the same corporate issuers. The latter is indicative of decent investor demand.

View – EdenTree considers environmental management as one of “nine positive pillars” by which companies are positively screened for investment. Green bonds sold towards projects that mitigate climate change impacts and enhance resource efficiency are not only a credible tool for businesses to reduce their environmental footprint but also have a robust investment case. As such, EdenTree holds Green bonds of companies in its permissible investment universe, with their raison d’être holding true to the company’s ethos of targeting profit with principles.

Notes

*-The bonds referred to in this article are “Use of proceeds” bonds, whereby the investor has full recourse to the corporate issuer as opposed to Revenue bonds, Project bonds or Securitized bonds. For the latter corporate debt categories, redress would come from revenue streams, project assets or a combined group of projects respectively.

Literature

Climate Bond Initiative – Explaining Green Bonds

Link: https://www.climatebonds.net/market/explaining-green-bonds

 Climate Bond Initiative – History

Link: https://www.climatebonds.net/market/history

 European Investment Bank - EIB Climate Awareness Bonds

Link: https://www.eib.org/investor_relations/cab.index.htm

 Transport for London – Framework for a TFL Green bond

Link: https://content.tfl.gov.uk/tfl-green-bond-framework.pdf

 Unilever – Independent assurance |Sustainable Living

Link: https://www.unilever.com/sustainable-living/the-sustainable-living-plan/our-approach-to-reporting/independent-assurance/

 HSBC Global Research – Global Green Bonds, Outlook for 2016 

The value of an investment can fall as well as rise as a result of market and currency fluctuations, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. If you are unsure which investment is most suited to you, the advice of a qualified financial adviser should be sought. EdenTree Investment Management Limited (EdenTree) Reg. No. 2519319. Registered in England at Beaufort House, Brunswick Road, Gloucester, GL1 1JZ, UK. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association.