Boost for green bonds space as CBI lifts certification scheme to company level
Green bonds are increasingly gaining momentum with the CBI becoming the latest key player to confirm their value within the finance space
Green bonds received a shot in the arm yesterday as their recognition and value within the financial services space is expanding.
The Climate Bonds Initiative (CBI) announced it plans to offer company-level certification through its Climate Bonds Standard and certification scheme.
The move underpins how sustainable bonds are rapidly gaining traction, and not just within Europe and the US.
Certification
According to the CBI, its new certification will help legitimise the climate credentials of the corporate, providing a shortcut to issuance and certification of a range of sustainable finance instruments, including sustainability-linked bonds and sustainability-linked loans.
Anna Creed, director for thought leadership at the CBI, explained that “until yesterday, the CBI was certifying only use of proceeds and similar instruments. In the new expanded standard, we're also able to certify assets, sustainability linked debt, bonds and loans, and entities as well."
Creed noted that “it is our belief that once you have reviewed a company to have a critical and ambitious future emissions reduction targets and transition plans all the debt that they're issuing, including general purpose debt, should automatically be recognized as contributing to the low carbon transition as well.”
In addition, Sean Kidney, chief executive of the CBI, explained that the move had been made following the perception that more action needed to be done on a wider level to show net zero credentials in the financial space.
This followed from developments such as the recent Intergovernmental Panel on Climate Change report which warned the world it is 'now or never' as it is extremely likely the most ambitious climate targets will be missed.
The certification scheme will also be sector specific, with areas such as the phaseout of stranded activities considered against whether it is in a more difficult to transition area such as steel.
Crossover with standards
Orith Azoulay, head of the Green and Sustainable Hub at Natixis, questioned the CBI on areas such as potential crossover with the Climate Transition Finance Handbook from the International Capital Markets Association.
Creed said: “There's a huge degree of alignment between a lot of these pre-existing initiatives, while we've tried to streamline it down. So we're not entirely aligned, but we've used a lot of what's out there, and tried to consolidate it.”
All the debt that [net zero entities] are issuing should automatically be recognised as contributing to the low carbon transition as well.
During a press conference on the expansion of the standards, Kidney also relayed his expectation that the sustainability-linked bonds market, currently worth $400 billion a year, could grow a further 25% by the end of 2023.
The CBI’s certification scheme will operate under the assumption of a 1.5C° transition pathway, in contrast to the Science Based Targets initiative which varies between 1.5C° and 2C°.
According to the CBI, China is now “the world’s second largest and fastest growing source of green bonds”.
Investment methodology
The CBI's move comes as a majority of public companies are expected to update their investment methodologies in the next few years to include sustainability metrics as a key part of their return on investment (ROI) analysis.
This is because many organizations have evolved from a purely risk-oriented approach to ESG concerns and have begun to optimize their programs to burnish their reputation and actively attract customers, investors and talent, according to Melanie O’Brien, VP analyst, research, in the finance practice at technological research and consulting giant Gartner.
She made the bold statement that “60% of public companies will have updated their investment methodologies to include non-financial information related to sustainability by 2026, which will facilitate longer-term and transformative sustainability investments.”
In fact, Gartner expects more than $3 trillion of green-linked bonds will be issued by 2026, accounting for 30% of total market issuance.
Tsunami of green bonds
In another boost for the green bonds space, BNP Paribas Asset Management recently pointed out that, in recent years, the market for sustainable use-of-proceeds bonds has grown significantly – annual issuance of green, social and sustainable (GSS) bonds rose from $95 billion in 2018 to $735 billion in 2021, according to Bloomberg data.
However, the sustainable labelled bond industry had a difficult 2022 amid broader macroeconomic issues, causing annual issuance of GSS bonds to fall to $572 billion.
The energy crisis, COVID-19 pandemic and last year’s interest rate rises have created a challenging macroeconomic environment which has been exacerbated by the war in Ukraine.
This has led to a major sell-off across bonds and equities – it has been estimated that stock and bond markets lost around $30 trillion in value in 2022.
More than $3 trillion of green-linked bonds will be issued by 2026, accounting for 30% of total market issuance.
As inflation subsides and the pace of interest rate rises moderates in the course of 2023, BNP expects the outlook for sustainable labelled bonds to improve.
The Sharm El-Sheikh Implementation Plan launched at last year’s COP27 meeting includes an estimate that the transition to a low-carbon global economy to fight climate change would need investments totalling at least $4-6 trillion per year.
According to the UN, the transition will require central banks, commercial banks, institutional investors and governments to act rapidly to address the lack of funding. Sovereign GSS bonds are expected to play a large role in plugging this financing gap.
COP27 saw a number of countries updating their nationally determined contributions (NDCs) – plans by individual countries to reduce national emissions and adapt to the impact of climate change. We believe financial tools including green bonds can go a long way towards meetings these targets.
January 2023 already saw a string of sovereign green bond issues by Hong Kong, Slovenia, Ireland and the Philippines. Hong Kong raised $5.75 billion in the largest sustainable labelled bond ever issued in Asia, while Slovenia collected around $1.35 billion.
India raised about $1 billion with its first sovereign green bond. The issue was largely picked up by local banks and insurance firms.
A 2022 Moody’s report on the challenges emerging markets may face in achieving a ‘just transition’ emphasised the role sustainable labelled bonds can play in funding the gap between current government budgets and projected just transition costs.
Energy security
Finally, as the importance of energy transition gains traction, there are many opportunities for companies to use bonds to help raise the capital needed, particularly in carbon-intensive sectors.
The energy, building and transport sectors are large use-of-proceeds bond issuers. For example, Dutch-German grid operator Tennet launched a £3 billion green bond last October for its onshore grid to increase the transmission of renewable energy.
As part of efforts to decarbonise its corporate bond portfolio, the European Central Bank has said it would give green bonds preferential treatment in its primary market.
If other central banks were to take a similar stance, this could encourage companies to issue more green bonds.
Moody’s has said that the energy crisis has increased the prospect of greater long-term sustainable debt issuance to finance Europe’s energy transition as the region seeks to move away from reliance on Russian fossil fuels.
To accelerate such a shift, significant amounts will need to be invested in infrastructure. Much of this could be financed with sustainable bonds, Moody’s said.
Regulatory landscape
Over the past few years, there has been extensive progress in developing standards for the GSS bond market. The leading set of standards are the Green, Social and Sustainability Bond Principles by the International Capital Markets Association.
These guide issuers on how to select the right projects and set standards on post-issuance compliance and reporting.
The European Commission has devised a European Green Bond Standard (EUGBS). Although currently voluntary, it could become mandatory for issuers in the future.
Additionally, the Climate Bonds Initiative has published the Climate Bond Standard, which outlines international best practices for labelling green investments.
More regulators are working on defining green bonds. The China Securities Regulatory Commission has introduced green bond principles to unify the country’s domestic market. The principles reference ICMA standards.
Like the ICMA framework, they provide four core components: use of proceeds, project evaluation and selection, management of proceeds and duration of information disclosure.
Sustainable Fitch said China’s requirements on working capital are unclear since they do not specify the types of working capital and the amount of proceeds that can be used to repay an issuer’s debt.
Last month, the Securities and Exchange Board of India approved a stronger framework for green bonds that introduced the concept of green bonds and specified the basic dos and don’ts in relation to green debt.
As standards develop and investor confidence increases, the market for sustainable bonds can be expected to continue., BNP Paribas stated, stressing that "stable macroeconomic conditions would certainly help."
