A new trend in money: environmental bond issuance this year exceeded 27 trillion yen, a record high. The wave of ESG also approaches government bonds
By Hiroko Matsumoto
This piece was originally published on The Nihon Keizai Shinbun
Translated by IFC
Environmental bonds (green bonds) that limit the use of proceeds for environmental business have been growing rapidly in terms of issuance volume. In 2019, it exceeded $ 250 billion (about 27 trillion yen), setting a new record high. Globally, pension funds and insurance companies that place greater emphasis on ESG (environment, social, and governance) are increasing their investment in green bonds, and in Japan, Government Pension Investment Fund (GPIF) is following the move. Increasing environmental awareness creates a new trend in the global money market.
The issuance volume of green bonds has significantly increased in recent years.
According to International Finance Corporation (IFC), a member of the World Bank Group, the total issuance volume has already exceeded a record high of $ 181.7 billion in 2018 by 40%, reaching over $ 250 billion, based on the data compiled by Bloomberg. The data includes issues by corporates and financial institutions, as well as international organizations and national and local governments.
In November, Apple issued 2 billion euros (approximately 240 billion yen) in total of 6-years and 12-years green bonds whose proceeds will be used to reduce greenhouse gases. In October, Bank of America, PepsiCo and others also issued more than 1 billion dollars of green bonds respectively. Corporate issuers have spread to emerging countries such as Russia and Kenya.
In November, NIDEC, a Japanese auto parts manufacturer issued a total of 100 billion yen of green bond, the largest size of issuance as a deal in Japan. The proceeds will be used to develop new technologies such as drive motors for electric vehicles.
Furthermore, uniquely structured environmental bonds have begun to appear. Italy’s energy company ENEL has issued bonds that raises coupon paid to investors by 0.25% if it fails to meet its renewable energy target by 2021. A similar scheme of bonds is likely to expand in the future.
Green bonds first appeared in 2007. The total amount of issuance in the world to date is about $ 830 billion. Since the size of the bond market is about $ 100 trillion, it has grown to close to 1% of the total in over 10 years. The major reason for growth is that investors, who now are willing to address climate issues and put more focus on ESG, started to select and evaluate investment destinations. A similar sentiment spreads among individual investors; the net assets of a green bond ETF managed by LYXOR, a French asset management firm has grown to about $ 200 million. Black Rock and other companies also added green bond ETFs to their product line-up.
In Japan, GPIF is shifting its focus on green bonds. It is now selecting a green bond index calculated by the private sector that will serve as their benchmark for investing in green bonds. Ministry of the Environment has taken support measures by subsidizing part of green bond issuance costs.
The issuance pace is likely to accelerate further. “ESG bonds including social bonds took more than a decade to grow up to 1 trillion dollars. It will take only 3 years to take another 1 trillion dollars, and it will be hitting another trillion every quarter in a couple of years, and that is the direction we are heading.” said John Gandolfo, Vice President of IFC.
Government bonds might be a key to boost market expansion. At present, only France, Belgium and Chile are the only sovereign issuers of green bonds. Japan’s Ministry of Finance currently has no issue of funding under extremely low interest rates and is still being cautious to green bond issuance. However, the wave of environment-focused approach may spread to government bonds as global investors become more sensitive to risks associated with climate changes.
Commonize key indicators in impact reporting
I interviewed Mr. John Gandolfo, Vice President of the International Finance Corporation (IFC), a major issuer of green bonds as well as active investor of green bonds through investment funds.
Please tell us about the issuance of environmental bonds.
John Gandolfo: “We have issued more than US $ 10 billion dollars (about 1 trillion yen) of green bonds in 16 different currencies including Japanese yen. In case of IFC regular bonds, approximately 70% are being purchased by central banks and official institutions, while about half of our green bonds are being bought by long-term institutional investors such as pension funds and insurance companies. We do not see difference in spread between our regular and green bonds.”
Do Japanese investors also invest in your green bonds?
John Gandolfo :“Japan has been always a very important market to IFC; 20% of our funding programs was targeted for Japanese investors. The half of Japan funding is supported by institutional investors, and the rest are mainly sold to individual investors by “Uridashi” bonds. The broader investor base is one of attractive points in the Japanese market. ‘’
Do you see any challenges in the green bond market?
John Gandolfo: “Impact reporting would be challenging. It is necessary to disclose the use of proceeds and impacts of green bonds after they are issued, but the reporting format differs by issuer, making it difficult for investors to compare. We worked together with other international development financial institutions to create a reporting template including a number of key indicators that all impact reporting should have, such as greenhouse reduction numbers and energy produced by renewable sources. Simple impact reporting is difficult. Artificial intelligence (AI) may be able to contribute to process a vast volume of data in different formats.
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