Why green bonds are reaching record highs

Why green bonds are reaching record highs

The green bond market rose to record highs in 2016, but it still only made up 1.4 percent of global debt market issuances. 

Last year was a big year for green bonds. Apple issued the largest green bond by a U.S. technology company, Poland issued the world’s first sovereign green bond and total green bond issuances grew to a record high.

According to a recent report by Moody's Investors Service, the rise of green bonds issuances in 2016 is projected to carry over into 2017 as well. The report projects that green bond issuances will increase to over $200 billion in 2017 from $93.4 billion in 2016 if green bonds grow at their 2016 rate.

But the report also shows that green bonds make up just a fraction of the global debt capital market issuances at 1.4 percent and large U.S. corporations are lagging behind other green bond issuers.

"In the end, if our society is going to succeed in transitioning to a low-carbon economy you’re going to need even more than $200 billion in green bonds," said Henry Shilling, a senior vice president at Moody’s and one of the author’s of the report.

What are green bonds?

According to the Climate Bonds Initiative, green bonds are a financial instrument used to finance green projects or initiatives. While there is no clear definition for what qualifies as a green project, some companies such as Apple and Toyota have issued green bonds to finance energy efficiency projects, green buildings and electric powered cars.

Green bonds operate similarly to non-green bonds and any institution with bonding authority can issue green bonds: financial institutions; municipalities; NGOs; and sovereignties.


The first green bond was issued by the World Bank and the European Investment Bank in 2007, and since then the market has grown substantially. Between 2011 and 2015, green bond issuance increased every year by an annual average of 163 percent, according to Moody’s.

In 2016, green bond issuances grew at a slower rate than in years past, rising 120 percent, but the volume of green bond issuances rose to record highs of $93.4 billion and issuances totaled $30.2 billion in the fourth quarter alone.

U.S. corporates lagging behind

When Apple announced in February that it would issue a $1.5 billion green bond to finance a variety of green projects, Shilling said that some predicted that it would be a watershed moment for companies to issue green bonds.

But Shilling said so far few companies have followed suit and corporations have yet to come along to issue green bonds at the same rate as other issuers.

"In the U.S. I would call them (corporates) missing in action," said Shilling.

Based on the report, the U.S. accounts for 15.3 percent of total green bond issuances in 2016 and 14.7 percent in the fourth quarter of 2016. Shilling said the majority of these issuances are conducted by municipalities in the U.S. rather than corporations.

Shilling adds that some U.S. corporations are hesitant to issue green bonds because they do not see it as a value proposition, since green bonds have the same market price as non-green bonds.

"There is the view that it (green bond issuance) may take more work and more of an administrative burden," said Shilling. "Also there is some concern that there is a reputational risk if they issue a green bond and the marketplace doesn’t align with the issuer's viewpoint that these are green assets."

Shilling said this could change if there were more tax incentives to issue green bonds and if green bonds could realize a value proposition.

The report said that the public sector at large could incentivize green bond issuance by reducing taxes on interest income, applying tax credits on bonds or offering preferential treatment of green bonds in monetary regulation and central bank strategy.

Green bond growth in China

One of the largest drivers of growth in green bond issuances has come from a perhaps unexpected place: China.

According to the report, China-based green bond issuers issued 35 percent of the world’s green bonds with nearly $32.9 billion in green bond offerings. In the fourth quarter of 2016, China-based issuers accounted for $12.5 billion, or 41 percent of total volume.

Nearly half of all green bonds are issued by financial institutions such as banks, and China-based banks accounted for $9.6 billion in issuances, or nearly two-thirds of total issuances by financial institutions in the quarter.

The report said that China’s green bond issuances are a result of its climate commitments and its "ambitious renewable energy development agenda."

Green bonds under Trump

The Paris climate accord has played a large role in driving the growth of green bond issuances as countries look to mitigate climate change and limit the world's usage of greenhouse gases. The U.S.'s commitment to the Paris climate accord, however, is uncertain as newly elected President Trump previously has pledged to cancel the U.S.'s involvement.

Shilling said Trump's policies wouldn't have much impact on green bond issuances by municipalities, but the uncertainty surrounding his policies could affect corporate issuers.

"It would be certainly be good to see corporate issuers coming into this space in greater numbers in the U.S," said Shilling. "Those corporate issuers may be reticent, at least early on, until there is more clarity on Trump’s policies."