Bonds: Growing need for retail green bonds

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 2, 2018 - July 08, 2018.
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Issuances of green bonds — funds specifically raised to support climate-related or environmental projects — have grown exponentially over the past few years. While the bonds have attracted large inflows from institutional investors, there are still limited options for retail investors, says Mushtaq Kapasi, chief representative for Asia-Pacific at the International Capital Market Association (ICMA).

“Currently, the average retail investor may find it more difficult to invest directly in green bonds. They tend to be marketed to institutional investors that are able to deploy larger amounts of capital. But that does not mean there are no options. We are currently seeing more sustainable funds — which may be a mix of green bonds, socially responsible equities and private equities — but we think more is needed,” he adds.

“Some of the big funds have started to put this together. I think this is a growth area because there is certainly more interest in green bonds from the [banks’] private wealth investor base today as well as from retail investors.”

Kapasi was speaking on the sidelines of the recently held “Harnessing Islamic Finance for a Green Future” conference that was jointly organised by the Securities Commission Malaysia, the World Bank and IOSCO Asia Pacific Hub.

There are currently a few mutual funds and exchange-traded funds (ETFs) with exposure to green bonds that are available to retail investors. They include Mirova Global Green Bond fund, Calvert Green Bond fund and VanEck Vectors Green Bond ETF, which tracks the S&P Green Bond Select Index.

The growth of the green bond market has been dramatic in the past few years, says Kapasi. Last year alone, bond issuances that were consistent with ICMA’s Green Bond Principles (GBP) were worth more than US$150 billion while the current outstanding amount is more than US$300 billion.

The GBP, which were introduced by ICMA in 2014, are voluntary process guidelines that recommend transparency and disclosure as well as promote integrity in the development of the green bond market by clarifying the approach to green bond issuances. Apart from providing issuers with guidance on the key components involved in launching a credible green bond, the principles also aid investors by ensuring the availability of necessary information to evaluate the environmental impact of the green bond investments.

Despite the exponential growth, the green bond market is still very small in proportion to the overall global bond market, which is currently estimated to be worth more than US$50 trillion, says Kapasi. However, there have been many positive trends in the green bond market, most notably the emergence of issuances by multilateral development agencies such as the World Bank and financial institutions across the globe, he points out.

Today, sovereign green bonds have been issued by countries such as France, Poland and Indonesia. “We are also seeing an enhanced geographic distribution. At the beginning of the green bond industry, the issuances and investors tended to be European and US-focused,” says Kapasi.

“China, however, came in about three years ago and quickly became one of the largest issuers of green bonds in 2016. In terms of issuance volume, the developed market is still dominating, but there has been huge growth in emerging markets.”


Growth catalysts

There are a number of catalysts driving the growth of the green bond market, says Kapasi. In addition to a growing awareness of the need to tackle climate change, there has been a constant push to meet the UN’s Social Development Goals and pressure for more involvement of institutional bodies.

“On a more concrete level, investors are now more interested in investing in green assets. They are expressing interest to invest in something ethical, Islamic or environmentally friendly. Governments are also playing their part. The introduction of the Asean Green Bond Standard (AGBS) is a prime example of that,” says Kapasi.

Last November, the Asean Capital Markets Forum launched AGBS to push for a standardised set of rules for green bonds across Asean members. It was developed based on ICMA’s GBP and tailored to meet the needs and commitments of Asean members.

According to an April 1 report by the World Bank, there is huge potential for green investments in Southeast Asia. Asean economies are expected to grow at 5.2% per year between 2016 and 2020 and will require infrastructure investments of about US$470 billion until 2020. The demand for green investments until 2030 stands at about US$3 trillion, driven by factors such as growing populations and consumption as well as a rising number of value-based (ethical) investors.

Currently, there are no universally accepted standards for green bonds. Countries and regions either have their own standards to follow or rely on various private and non-governmental organisation sector criteria for green bonds. The discussions on standards can be very complex as there are differing opinions among market players.

“The need for balance is something we have dealt with before with the GBP. On the one hand, the guidelines should be as explicit and as strict as possible to ensure that everyone knows what is green and what is not so that no one can just ‘greenwash’ an issuance,” says Kapasi.

“On the other hand, if the guidelines are too strict, then it may be very difficult to grow the market because issuers would be deterred. What we are really trying to do is to grow the green bond market and ultimately increase the number of investments in environmental projects.”

Going forward, he is optimistic that there will be more participation in green bond investments from retail and sophisticated investors. There are now a number of family offices, especially in Europe, that are extremely concerned about social and environmental issues. Some of them even have their own internal screening guidelines.

“While it may take some time for the trend to reach Asia, we are seeing more awareness among investors. Because of this, a lot of the big investors such as pension funds, mutual funds and insurers are now more careful about what they invest in. They know that their stakeholders care,” says Kapasi.

Most green bonds are structurally identical to plain-vanilla conventional bonds. Some investors shy away from green bonds because they think these are just a more expensive version of the plain-vanilla ones. However, while there is data to suggest so, most of the market data ICMA has so far suggests that green bonds are priced very close to conventional bonds.

“In fact, the downside of investing in a green bond compared with a vanilla bond is quite low. There is no difference in legal terms or credit profile, so you are not giving up much when you invest in a green bond,” says Kapasi.

He adds that there are many reasons investors should consider green bonds. Apart from the ongoing reporting, which can provide valuable information, green bond investments are a good way to diversify geographical risk.

“By knowing it is a green bond, investors understand where the proceeds are going. There is a level of trust in the assets that plain-vanilla bonds may not have. This allows them to invest in a geographical market that they would not have considered before.”