Green Bonds are the New Black for Cleantech

After precedent-setting green bond issuances from Bank of America and the state of Massachusetts, the green bonds market is set to go through a serious growth spurt in the next year.

“Green bonds” are bonds issued to fund projects aimed at reducing greenhouse gases or supporting sustainability, including those involving clean energy, energy efficiency, transportation and energy storage, among other energy related purposes. Typically, such bonds are issued by entities like the World Bank and the European Investment Bank, but corporate bond issuances last year amounted to $10 billion and HSBC has predicted that figure will balloon to two or three times that in 2014.

In addition, a consortium of 13 investment banks in January issued the Green Bond Principles, which is a set of voluntary guidelines regarding the components involved in launching a green bond. The principles will provide more clarity to investors interested in such investments and will help bring more integrity to the green bond market.

“Green bonds are a source of hope and action,” said Amelia Timbers, an energy program manager with California based non-profit organization, As You Sow, during a webinar the group hosted in February. “Green bonds are quickly emerging as one of the most competitive options for financing the trillions of dollars of low carbon infrastructure we need to mobilize in order to avoid the danger of climate change.”

Sean Kidney, the CEO and co-founder of the Climate Bonds Initiative, pointed out that the corporate issuances of green bonds began last year with a few small offerings, however, they were well oversubscribed, which is a clear signal of strong interest.

In 2013 Electricite de France issued a $1.4 billion euros bond ($1.9 billion), and Swedish property company Vasakronan issued at $197 million bond. Then, Bank of America set what Kidney described as a “strong precedent” by issuing half a billion in green bonds linked to loans B of A made in qualifying green investment areas.

“You’re going to see a lot of those in the coming year from banks that are looking to prime the  market for securitization eventually and of course to let the  market know about the good work they are doing,” said Kidney during the As You Sow webinar.

In addition, Massachusetts became a success story by issuing a $100 million green bond, making it the first state to do so.

Colin MacNaught, the assistant treasurer for debt management in the Massachusetts State Treasurer’s Office, said the lure of finding new investors led them to repackage their environmental projects together in a green bond with a 20-year maturity. And it worked. MacNaught said the bond was 30% oversubscribed and they saw “significant demand” from both institutional and retail investors. Specifically, MacNaught said seven new institutional investors invested in their bonds that they had never seen before, and the largest order came from TIAA-Cref.

In addition, there were 154 distinct retail orders for the bonds, which included 45 orders from individual investors for one bond, said MacNaught during the As You Sow web conference. And while one $5,000 investment doesn’t seem like a lot, it signaled demand from investors spanning the full spectrum from individuals to institutions, he said.

“I feel like we’ve opened up Massachusetts to a whole new realm, a whole new pool of capital to investors who want to support what the state is doing,” said MacNaught.

Indeed, a report jointly issued last summer by Climate Bonds Initiative and HSBC, “Bonds and Climate Change: The State of the Market in 2013” states the progress of climate policies around the world have propelled certain clean technologies to a stage of maturity that is particularly well-suited to bond investment.

Plus, Kidney adds that while the green bond market numbers are small in the scheme of things, there are already bonds out there that should be considered green bonds. The Climate Bonds – HSBC survey found that the climate bonds market globally was a $346 billion market, of which 89% is investment grade. In addition, the report estimates that the size of the climate bond market will likely grow in the next year.

One of the main drivers, the report concluded, is the fact that many institutional investors are trying to get head of the 2015 Global Investor Coalition on Climate Change climate agreement. The global coalition produces annual reports describing the way investors are factoring climate risk into their investment policies. The group works off a three-year plan leading up to 2015.

Standardization and commoditization which can grow out of the green bond principles issued in January will be essential in making a large bond market, which Kidney believes will happen.

“It’s going to be a big year.”

And at the recent Cleantech Innovation Summit, Skip Grow, Managing Director in Morgan Stanley’s Clean Technology Group, stated that the clean energy public markets have “turned the corner.” He points out that new clean energy financial innovations, such as securitization, green bonds, and YieldCos are bringing a new set of investors and more dollars into the sector, which will also help raise capital for venture-backed cleantech companies.

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