Increasingly, this market represents a growing opportunity for financial advisors and institutional investors, note Brian S. Ellis, Fixed Income Portfolio Manager and Henry Mason, ESG Research Associate at Calvert Research and Management, one of leading global Responsible Investing Investment firms.

“The pandemic has heightened the awareness of environmental, social and governance (ESG) factors as drivers of social responsibility and impact as well as financial performance — turning 2020 into a pivotal year for responsible investing, especially in fixed income.

“Green bonds generally refer to how the proceeds will be used, and identify specific eligible categories of assets that address environmental challenges,” they say.

Ellis says: “Curbing climate change is the top reason that national governments issue green, social and sustainability (GSS) bonds, according to the Climate Bonds Initiative (CBI). Those sovereign issuers have also served as catalysts for corporate and institutional issuers, according to green bond analysts. From public pension plans to banks to endowment funds, we are seeing ever-greater institutional interest and mandates for sustainable and green investment.

“The asset growth in green bonds is a factor in their attraction. With overall green issuance now approaching the size of high-yield offerings, green bonds are recently offering greater liquidity and diversification opportunities — a major concern for institutional investors.

“We also see institutional investors looking for deep, proprietary work behind green bond offerings as well as measurement and reporting of impact metrics. That is particularly true for consultants and banks who now have dedicated sustainability teams to help evaluate the ESG profiles of issuers and securities.”

Calvert is one of the largest green bond managers in the U.S. and a pioneer in applying financial materiality and impact metrics to investments. As green bonds are newer to the industry, developing metrics is a younger work in progress, and Calvert has led in applying deep ESG research to both the issuers of green bonds as well as the securities themselves.

Ellis notes: “We believe proprietary research — like Calvert’s — is especially vital with so many new issuers and projects that need specialized analysis.

“During the quarter, we invested in a U.S. electric power producer whose parent company is the first U.S. utility to commit to being carbon neutral by 2050. The company plans to use proceeds of the issue to develop wind power capacity, which, along with other expanded renewable capacity, will replace the coal facilities it is retiring.

“We also initiated a position in a leading memory semiconductor producer whose parent company last year became the first South Korean company to commit to transitioning to 100% renewable energy. Proceeds of the issue will be used for the development of projects related to sustainable water and wastewater management, energy efficiency, pollution prevention and biodiversity conservation.

“We continue to be selective in independently evaluating the structure of green bonds and the overall issuer profile across sectors, industries and countries to identify the most attractive securities for our portfolios. Importantly, across our green bond strategies, we seek issuers with strategic environmental goals that are aligned with the green debt they are issuing.”

——-

[1] Source: BofA Global Research. Notably, these figures are not comparable to data provided by Climate Bonds Initiative (CBI), frequently cited here. CBI data was not yet available for this quarter.

The post Green bond issuance surges as more investors seek alignment with climate-risk and environmental solutions appeared first on AdviserVoice.

Brian S. Ellis, Calvert Fixed Income Portfolio Manager says: “Although the impact of COVID can be seen in the growth of social debt versus other sustainable debt categories in 2020 (Figure 1), green bond issuance (debt issued by governments, banks, local governments and corporations to finance climate change and other environmental solutions) also experienced a steady recovery as 2020 progressed.^{[2] “}

According to data from ING, the third quarter (Q3) of 2020 marked the highest recorded level of green bond issuance for any previous Q3, and continued growth led to cumulative global issuance of $1 trillion by mid-December. Use-of-proceeds remains the most common form of green bonds issued, comprising 87% of all issuance since first offered by the World Bank in 2008. In 2020, use-of-proceeds bonds, which finance projects related to energy, transport, building and water, among others, accounted for 84% of total green bond issuance.

Ellis says: “The green bond market has grown to levels not many would have imagined at the beginning of this decade. In our view, this trend will likely continue as global demand grows for debt that supports environmental and other sustainability-focused projects.

“Despite early concerns about a potential shortfall in 2020 issuance, $223 billion of green bonds was brought to market by mid-December, with the yearly total set to fall just shy of the market’s 2019 high-water mark of $255 billion. Looking ahead in 2021, many analysts project the strong recovery in green bond issuance to continue — estimates range from $300 billion to nearly $500 billion.^[3]

So, what are the catalysts behind this growth and recovery?

Ellis notes: “Early in 2020, the growth story revolved around corporate issuers, both financial and nonfinancial, which had replaced early green finance leaders, such as development banks. As corporate issuance of green bonds slowed, in part due to COVID, other issuers such as government-backed entities grew their market share.

“Later in 2020, sovereign issuers that had previously concentrated their efforts on pandemic recovery began to shift their attention back toward environmental impact. Germany and Sweden alone issued a combined $9.4 billion USD of green bonds over the span of a single week in September. By the end of 2020, the list of sovereign green issuers grew to 17.

“State-level and other international support for the green market is expected to grow further in the coming months, with the UK, Canada, Spain — and potentially up to 11 other sovereigns — set to issue inaugural green bonds in 2021.

“Most significantly, the European Union (EU) announced in September that it will sell 225 billion euros ($267 billion) of green bonds as part of its pandemic recovery fund, making up about 30% of the EU’s €750 billion rescue package.^[4]”

———

[1] Climate Bonds Initiative (CBI) Green Bond Market Summary H1 2020, August 2020. To be classified as “green” by the CBI, 100% of a bond’s net proceeds must be dedicated to financing or refinancing “green” assets including renewable energy, low-carbon transport, low-carbon buildings, sustainable water and waste management, sustainable land use and climate change adaptation measures such as flood defenses.
[2] RBC Capital Markets Sustainable Debt Newsletter, November 2020.
[3] Bloomberg, “Sustainable finance debt to top $1 trillion in 2021, SEB says” by Frances Schwartzkopff, December 10, 2020.
[4]Bloomberg, “EU plans to sell $225 billion euros of green bonds for stimulus” by John Ainger and Lyubov Pronina, September 16, 2020.

The post Green bonds on track to grow in 2021 appeared first on AdviserVoice.