Green bonds: a simple trend

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The COP 21 stressed the importance of directing financial flows towards financing the energy transition. Given the magnitude of the needs (more than $53 trillion by 2035), new sources of funding are needed. Green bonds appear to be a preferred financing instrument, both for issuers to diversify their investor base and benefit from oversubscription, and for investors to meet their mandate and implement their long-term strategy. As a result, green bond issues quadrupled between 2013 and 2015, reaching $42 billion in 2015. However, green bonds present risks (counterparty risk, credit risk, green washing risk, consisting in qualifying projects that are not green) and additional costs compared to traditional bond issues (labelling, reporting). To develop this market, public authorities have a role to play in promoting its organisation, without, however, increasing the risks for the financial system.

The COP 21 recognized that the current trajectory of greenhouse gas emissions involves extreme climate change and consequences. Limiting global warming below 2°C at the end of the century compared to the pre-industrial era requires a limited global carbon budget and therefore “financial flows compatible with a development profile towards low greenhouse gas emission”. However, capital allocation remains sub-optimal today due to the lack of an adequate carbon price, weak political signals (persistent carbon subsidies) and uncertainties about the consequences of greenhouse gases. It is common practice to distinguish the market for unlabelled green bonds, which would have reached USD 576 billion and whose underlying assets are presumed to prevent climate change, from the market for labelled green bonds (USD 118 billion), which are subject to a label and, most often, to an external review. While green bonds are a complementary source of financing for the transition, paradoxically they do not offer any financial advantage to the issuer. If some studies conclude that there is a green premium paid by investors. Other studies consider that such a premium would not be justified by a lower risk taking. Green bonds even represent an additional cost for the issuer because of the labeling (an external review costs between $10,000 and $50,000), and for the investor who must spend more time analyzing this type of bond. Transparency requirements may also be subject to the confidentiality constraints of the issuer. However, there are a few advantages that explain the emergence of green bonds. They enable issuers to diversify their investor base and in particular to attract responsible and long-term investors. The issuance of green bonds allows the company to enhance its sustainable development strategy, such as Toyota ($1.6 billion of green bonds issued in 2016 for the development of its hybrid and electric vehicles) or Apple ($1.5 billion in February 2016). Green bond investors are less price-sensitive and more inclined to hold securities (based on a buy and hold strategy), which could reduce the volatility of securities in the secondary market. Green bonds also allow them to diversify their portfolios, particularly towards assets that do not present the risk of becoming silted up assets. They contribute to implementing their own long-term climate strategy and enhancing its value for investors. According to the IWC (2016), only 60% of green bonds are subject to external review. Market participants fear above all the reputational risk associated with eco-money laundering or green washing, i.e. the issuance of green bonds to finance projects that are not “green” or do not respect commitments, which would affect investor confidence. Issuers may also face a risk of green default, i.e. the evocation of their legal liability for non-compliance with commitments. In addition, for a given issuer, green bonds do not have
necessarily a less risky profile than a standard issue. While more than three-quarters of green bonds have a rating above A, the quality of the signature is mainly explained by the type of issuer (development bank, local authority, large company). Sectors that receive green bond financing may offer uncertain returns, such as investments.

To date, the development of green bonds does not seem to have increased green financing flows to the extent that the underlying bonds and projects would in all cases have been financed. Green bonds therefore play a complementary role in financing the transition but do not necessarily lead to increased investment flows.



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