Green and social bonds: what’s at stake for
investors?
Hervé Guez, Director of Responsible Investment Research
Emmanuelle Ostiari, SRI analyst
Marc Briand, Head of Fixed Income
Chris Wigley, Senior Portfolio manager
Written on 29/09/2014
EXECUTIVE SUMMARY
As the market for green and social bonds takes off, attracting ever more attention from the financial community and from
agents engaged in promoting the development of a more sustainable economy, we intend to revisit some larger questions
that this market raises. How far along have we come in the market’s development? What controversies does it provoke?
What is valuable about this market and how should we be thinking about its future development?
I.
Green and social bonds have carved
out a place for themselves in the
fixed-income market
Indeed, by the end of August 2014, the total issuance for the
year was close to USD 20 billion, 1.6 times that of 2013, which
was itself more or less a threefold increase compared to the
‘birth’ of this market in 2006.
A green or social bond is one that, in addition to its ‘usual’
characteristics (maturity, coupon, etc) is designed to finance
projects that offer environmental and/or social benefits.
“
The market for green and
social bonds has more than tripled in a
few short years
A market experiencing vigorous growth in many
directions
The year 2013 was full of questions raised by the rising tide of
‘green and social bonds’ or ‘sustainability bonds’. Was the
market witnessing an exceptionally good year or the start of a
sustained trend? This autumn, as the harvest gets underway,
2014 promises to be an excellent year and appears to confirm
that green and social bonds are here to stay, creating a new
sub class within fixed income.
Obviously, despite this impressive growth, green and social
bonds represent only a minute part of all bonds issued at the
moment (less than 1% of the bond market). Nonetheless,
qualitative indicators beyond this sustained growth encourage
us to believe that the trend is likely to continue.
www.mirova.com
1
Figure 1. Total number and value of sustainability bond issues greater than USD 200 million, as
at 31 August 2014
Source: Mirova / Natixis Global Market Research, 2014.
First, 2014 was the year that corporate issuers arrived in full
force. Whereas the market had previously been completely
dominated by supranational organizations, development banks
and international agencies, corporate issuances, which first
appeared in 2013, grew from 17% to reach nearly 50% of the
global volume of bonds issued at the end of August, 2014.
Figure 2. Distribution of sustainability bonds greater than USD 200 M by issuer type – as at
31 August 2014
Source: Mirova / Natixis Global Market Research, 2014.
www.mirova.com
2
Another interesting feature of the market’s growth has been
the noticeable increase in social bonds. This remains a narrow
market segment, however, the last few months bear witness to
a significant inroad made by bond issues with a social impact.
“
While 2014 was a year for
tremendous growth in the green bond
market, there remain several steps if
this success is to continue
It is fair to say that the market for green and social bonds
achieved a number of breakthroughs in 2014, however, the
chapter is by no means closed, and, beyond increasing
volume, there are several steps needed for this market to
realize its potential. As we see it, there are four significant
challenges ahead: i) ensuring more corporate bonds with a
broader variety of ratings (BBB and HY issuers); ii) attracting
more North-American and Asian issuers; iii) fostering activity
by sovereign issuers, and iv) growing the number of issues by
current issuers in order to produce meaningful issuer yield
curves.
consisting of agencies and supranational organizations, and
the second corporate bonds).
Well aware of this momentum, service providers are also
developing dedicated products and services. Hard on the heels
of S&P Dow Jones, MSCI and Barclays have announced the
launch of their own Green bond indices. Meanwhile, extrafinancial ratings agencies are beginning to offer specialized
services to supply second opinions.
The Green Bond Principles (GBP), created with the intention of
structuring the market, come on top of these many microeconomic aspects. Since clearly a green bond ought not to be
classified as such on the say-so of its issuer, so the market
1
needs a framework if it is to develop over time, and four banks
jointly published the GBP in January of 2014. Since then, the
governance of this initiative has been broadened and
strengthened. In terms of reinforcement, it will now come under
the aegis of the ICMA (International Capital Markets
Association). Its greater breadth takes the form of an executive
committee drawn from three groups: banks, issuers and
investors, with six members from each. The GBP now stand at
62 members in all, with several institutions (NGOs, service
providers) granted the status of “observers.”
Figure 3. Breakdown of GBP members by category
The market takes shape
The number of new issues remains the most visible indicator
for measuring the size and momentum of a bond market. But it
is worth remarking on how the market structure is evolving and
contributing to a growing sense that green and social bonds
are here to stay as an asset class in their own right.
Looking first at the microeconomic level, the number of
dedicated structuring and originating teams has increased. In
Europe, this market was initially the exclusive realm of teams
such as the SEB (Skandinaviska Enskilda Banken) and Crédit
Agricole CIB, Merrill Lynch, etc. Today, BNP and HSBC have
announced that they will be earmarking resources dedicated to
this asset class. Such investments in human resources
constitute a particularly strong signal.
Investors, for their part, are also getting organized. In addition
to Mirova, which, having been an important early supporter of
green bonds in its fixed income funds, recently announced the
creation of an open fund devoted to green bonds, Zurich
Insurance has also positioned itself as a leading player with
two portfolios of €1 billion each in green bonds (the first
Source: Mirova / ICMA, 2014.
Bank of America Merrill Lynch, Citigroup, Crédit Agricole CIB, J.P. Morgan Chase &
Co.
1
The GBP aim to provide guidelines for what constitute the
elements needed before a bond issuance can be considered
Green, with the dual goal of helping issuers design their green
bonds and assisting investors in evaluating the environmental
impact achieved by such bonds.
Rather than precisely defining the environmental impact
sought, the GBP focus on the governance criteria a bond
needs to use in order meet the definition of a green bond. This
framework is structured around:
-
The types of credit instruments that can be
considered green. In theory, the framework
accommodates any type of bond; practically,
however, most issuance has involved ‘senior
unsecured’ bonds.
-
The characteristics of the security, meaning:
1)
a description of the use of proceeds that makes
clear, as part of the bond’s legal documentation,
2
the types of projects eligible for funding,
2)
an evaluation and selection process that applies
to projects meeting the bond’s eligibility criteria
This framework, designed to provide green bonds with a
structure that will guarantee their credibility is supported by all
members; however, implementation of these recommendations
remains voluntary at this time, and the level of adherence to
these guidelines varies considerably, including among GBP
member organizations. Common sense suggests that this
flexibility is warranted by the embryonic nature of the market,
where players may have very different levels of maturity; thus
pragmatism advises that we let time do its work, and regularly
revise these principles—indeed, a drafting committee, on
which Mirova sits, has just been named within the executive
board—without doing anything to radically upset the market’s
momentum. But beyond the issue of adherence to the
principles enumerated above, there are three concerns that
remain all but absent from the GBP:
-
Defining what green is, and what is green. Here,
given the complexity of the issue and lack of
consensus on the matter, we do not expect much
progress from the GBP in the immediate future.
-
What exactly can green bonds fund? Can external
growth be financed using green bonds? Should
issuers operating solely in the domain of renewable
energy be subject to fewer requirements? And so
on…While it is difficult to secure a consensus on such
issues, we believe that the GBP are in a position to
offer guidance.
(examination and decision procedures, measures
for determining impact, documentation required
for verifying projects’ eligibility);
3)
4)
management of funds, including a dedicated
portfolio or internal audit process for tracking
funds, and an external auditor who confirms the
veracity of the information reported;
disclosure, in the form of a dedicated annual
report, of the projects and/or impact produced
-
Lastly, the desired quality of reporting remains
somewhat hazy, even if outlines have been sketched.
Here again, progress could be made through the
GBP.
consequent to the bond issue, using quantitative
and/or qualitative performance indicators;
-
The type of assurances such bonds should offer,
such as an independent expert’s second opinion
regarding criteria for project eligibility and, more
importantly, a third opinion, with this one being from
an independent audit firm.
2 Here, the GBP propose a non-exhaustive list of environmental categories, including
renewable energy, energy efficiency, waste management, sustainable soil
management, protection for biodiversity, clean transport and management of
drinking water.
“
The credibility of this new
market will depend on its capacity to
reinforce its standards
It is clear to see that the credibility of this new market will
depend on its capacity to offer satisfactory responses to these
questions. It is equally clear, in light of current debates on the
subject, that a broad consensus on these topics is not likely in
the immediate future. Nonetheless, we believe that in order for
a consensus to appear, debate there must be, and that
activity itself represents a significant risk to sustainable
development.
participants need to take a stance on these issues, even
though this means adjusting their positions as their experience
increases and the market evolves; only then can a consensus
coalesce around shared principles, ideally taking shape as a
label.
II.
2. A review of ESG risks to determine each actor’s
responsiveness to the ESG issues raised by the way they
do business. This evaluation is made on a three-point
scale: ‘Positive’, ‘Neutral’, or ‘Risk’.
Mirova’s current position
Figure 4. Indicative matrix of the elaboration of the Mirova
Sustainability Opinions
Concerning these three central questions, namely, how to
assess the green qualities of projects, the possible objects of
allocation, and the desirable quality of reporting, Mirova offers
the following analysis.
A methodology for evaluation consistent with
Mirova’s overall approach to measuring the
environmental and/or social contribution of an
investment
For Mirova, Responsible Investment aims to achieve
economic, social and environmental performance by directing
savings towards the entities, initiatives, and projects that
contribute to sustainable development. We are convinced that
extra-financial dimensions constitute a crucial component of
any investment strategy that aims to create value.
Source: Mirova, 2014
This matrix (Figure 4) provides a five-point scale (Figure 5) that
runs from Committed down to Negative and forms the basis for
Mirova’s sustainability opinions.
Consequently, Mirova seeks first and foremost to identify
entities or projects designed to seize opportunities associated
with the transition of our economy toward a more sustainable
society, while ensuring that potential environmental, social and
governance (ESG) risks are taken into account.
“
A methodology for evaluation
with two distinct levels: one to identify
sustainable development opportunities
and another to assess ESG risks
This philosophy is implemented as a two-tiered ESG
evaluation:
1.
A review of opportunities designed to determine how well
an activity (product service, project etc.) meets the
challenges of sustainable development. The level of
exposure is calculated in terms of the environmental or
social benefits an activity presents in comparison to a
business as usual scenario, and is expressed using a
four-point scale: ‘high exposure’, ‘significant exposure’,
‘low or no exposure’ and ‘negative exposure’. Negative
exposure occurs, for instance, when the nature of the
=
Schéma 5. Opinions Développement Durable Mirova
Source : Mirova, 2014
This methodology is applied, with suitable adjustments, for
each of the asset classes Mirova manages, including equities,
fixed-income securities and infrastructure.
Applied to green bonds, this evaluation framework would
ideally analyse the underlying projects, making no exclusions a
priori as to issuers, except as concerns those in flagrant
violation of the fundamental principles of the Global Compact
3
and OECD’s Guiding Principles.
In practice, the current levels of documentation for green and
social bond issues do indeed allow us to analyse the
environmental and/or social benefits of underlying projects
using our in-house grid (presented below). However, the
information provided at this time does not make it possible for
us to judge how the environmental and/or social risks
associated with underlying projects are handled. In the
absence of data specific to the project, the risk review segment
of the analysis will rely on information concerning the issuer’s
management of risk.
Thus our evaluation of green and social bonds has two
components: on the one hand the anticipated contributions to
sustainable development from underlying projects, and on the
other a review of ESG risks, primarily those of the issuer.
3
OECD Guidelines for Multinational Enterprises.
Environmental and/or social benefits ensuing from the use
of proceeds
Evaluating the environmental and/or social benefits associated
with the projects underlying green bonds obviously requires
transparency as to the use of funding and clear, verifiable,
criteria for determining projects’ eligibility to receive financing.
Once an issuer publishes information about a project, the first
task is to review how well its intended goal meets the
challenges of sustainable development.
The analysis of a project’s contribution must address the
following concerns:
-
Which sustainable development issues does the
project offer solutions to?
-
Will this project have a significant impact on the
sustainable development issue it aims to address?
-
Does the project really go beyond business as usual
practices?
The intent here is to determine to what extent underlying
projects offer sustainable development solutions. Mirova’s
opportunities grid considers six challenges: climate change,
resources, pollution, biodiversity, health, and development.
Each project may address one or several of these basic
sustainable development challenges.
Figure 6. Examples of « sustainability opportunities » by sector
Renewable energy (solar, wind, hydraulic,
biomass, geothermal energy)
Energy efficiency (in industrial processes)
Energy
Access to energy for the most disadvantaged
population
Technologies of CO2 emissions reduction (ex:
carbon capture and storage)
Green Mobility (electric, hybrid, fuel cell electric
vehicle, lightweighting, low rolling resistance,
solutions to reduce pollution relative to mobility
such as Nox, Sox, PM10, oceans acidification,
etc.)
Mobility
Alternative mobility to road/air transportation (ex
: rail transportation, maritime, bicycles, metro,
train, carsharing)
Access to mobility for the most disadvantaged
population (development of transportation
means)
Eco-efficiency of buildings
Sustainable infrastructures and cities (design,
Buildings and construction, environmental services)
cities
Social infrastructure (health, education, etc)
Access to housing for the most disadvantaged
population
Sustainable agriculture and forests (improvement
of agricultural productivity with reduced
environmental impacts, bio-based economy)
Resources Water security (water supply and sanitation,
agricultural and industrial water-use efficiency,
universal access to drinking water)
Other resources productivity (waste reduction
and recycling, etc)
Offers of specific products improving quality of
life for all (food, hygiene, etc)
Consumption
Eco-products / eco-services
Healthy products
Access to healthcare for the most disadvantaged
population
Healthcare
Unmet medical needs
Autonomy and quality of life (ex : home care)
Access to financing solutions for the most
disadvantaged population
Finance
Green investments (ex :financing of renewable
energy projects)
Enabling sustainable benefits (smart technologies,
access to health)
ICT
Green ICT
Access to ICT for the most disadvantaged
population
Climate
Change
Resource
√
√
√
√
Pollution
Biodiversity
Health
Development
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
Source : Mirova, 2014
For each bond, all the projects identified are reviewed in light
of these six issues. To be considered a green or social bond,
the underlying projects must meet the following conditions:
-
-
Have at least one ‘Significant Exposure’ rating for one
of the issues, that is, offer demonstrably improved
practices that exceed business as usual, as well as a
positive impact in the area under consideration.
Not exhibit negative exposure to any of the six issues.
We hope to enrich this basic framework for analysis as our
knowledge and expertise of the standards and best practices
prevailing in each sector progresses. A continuous learning
and adjustment process is crucial if this new financial vehicle is
to establish credibility as having genuine environmental and
social value.
Green bonds have ESG risks too!
Every project, every activity, however beneficial it may be with
respect to the challenges of sustainable development, carries
with it negative social and environmental externalities that vary
over the course of its life cycle (supply chain, development,
construction, operations, end-of-life). As we see it, responsible
investors should be taking these risks into account.
Where green and social bonds are concerned, current
documentation practices, unlike those prevailing in the area of
infrastructure finance, do not make it possible to determine as
precisely how environmental and social risks associated with
underlying projects are handled.
For lack of this information, we rely on available data on the
issuer’s handling of these risks. On the assumption that if an
issuer is responsible about controlling for potentially negative
social and environmental externalities in its activities overall,
there is a strong chance that the projects underlying its green
bond will be at least as well managed as the balance of its
activities.
Nonetheless, some best practices stand out. We could point to
the EDF’s green bond, which finances only projects that
respect a specific set of criteria established by Vigeo in order
to guarantee the responsible management of projects. These
include taking into account health and security issues affecting
employees, management of relationships with suppliers. In this
way, beyond the intent of the underlying projects (renewable
energy), which contribute to the energy transition, the issuer
provides investors with assurances that social and
environmental externalities are taken into account. However,
this level of detail remains a rarity for the moment.
Also, there remains, beyond concerns regarding how
environmentally or socially beneficial a project is, the question
of what kind of projects may be financed.
Use of proceeds
From investor’s point of view, the function of this market is to
provide an opportunity to contribute to the ecological transition,
by providing the capital necessary to the development of
business models offering social or environmental benefits.
Such rational altruism seeks to ensure that our model of
development becomes sustainable by transforming its core,
convinced that this is the only way to guarantee long term
returns and, thus, to stabilize long term liabilities.
From this perspective, there is, beyond the ‘green’ or ‘social’
quality of the underlying project, an additional question, which
is the nature of the project; and this, it seems, presents itself in
somewhat different terms for a creditor than it would for an
equity holder.
When one purchases shares in a business concern, it requires
one to take a global approach to social and environmental
analysis. After all, one becomes the owner of indivisible
portions of the company and responsible for both its assets
and its liabilities. A creditor is often in a somewhat different
position. When an issuer uses the market to raise debt capital
for ‘general corporate purposes’ its creditors are in the same
position as shareholders: there is no alternative but to consider
the environmental and social qualities of the issuer in their
entirety. Such an approach inevitably results in placing offlimits certain companies present in the equities and bond
markets. Regardless of the methodology employed
assessment is inevitably based on comparison, and almost
every SRI approach entails some exclusion, whether this is
done ex ante or ex post, on a sector basis or based on
normative criteria. The great strength of the green bond
concept is to tie investment to specific underlying projects.
Thus, no company is left out in the cold, as long as it has a
viable project for transformation to offer the market. The
counterpart to this inclusiveness is a stringent demand for
clarity as to the use of proceeds to finance investments that
induce the promised transformation. And, as we know, capital
markets are quite simply organized to ensure that debt
instruments are as fungible as possible. Green and social
bonds are at odds with this attitude, since their function is to
bind together financing and investment. One might summarize
the rational of this market as follows: using green debt to
finance green or social assets. The corollary of this principle is
that there cannot be more green or social bonds than there are
8
green or social assets on the issuer’s balance sheet, meaning
that such bonds may not be used to cover operational losses,
share buybacks, or to refinance existing debt, even if such
losses, shares or debt were to belong to green or social
companies.
“
The great strength of the
green bond concept is to tie
investment to specific underlying
projects.
This consideration of asset/debt relations is also interesting
insofar as it applies also to the financing of green or social debt
that can be securitized. While practically non-existent at this
juncture, we expect a bright future for this market in the coming
years.
Financing the ecological transition also means financing the
investments of consumers, especially assets like homes and
vehicles, which are often the leading items of both their
household budgets and carbon footprints! Consequently, there
is every reason to expect financial solutions, such as
mechanisms to refinance debt associated with energy-efficient
renovations, a major environmental concern if ever there was
one.
Clarity of the dedicated reporting scheme
The most controversial issue is probably the possible financing
of ‘green goodwill’ using ‘green debt’. For instance, is it
acceptable to use green bonds to finance the acquisition of a
renewable energy manufacturer? Issuers are tempted to
answer in the affirmative. From their point of view, a euro,
whether allocated to organic or external growth, involves much
the same process: what difference is there between investing
in the construction of a wind farm and buying one that’s
already built? Only the question of financial profitability, based
on a firm’s internal technical competencies will determine the
best choice. However, it is perfectly clear that for society at
large the difference is considerable. In the one case new
capacity is created, while in the other, there is simply a change
in capital ownership. In one case it is possible to objectively
identify gains compared to a reference scenario, while in the
other there is no change in the scenario underway. For this
reason we do not believe that green debt should be used to
back green goodwill. This does not close all doors to the
possibility of refinancing green assets as part of external
growth: however, only unamortized green assets can be
backed by green debt, not goodwill, which is merely a financial
return collected by the original capital investors, and not a new
investment. One might object that the acquisition price in fact
reflects the new value of these assets, and therefore goodwill
should be eligible for refinancing under principles that combine
backing green assets and debt. To this, we respond that i)
from a theoretical perspective, goodwill is a residual ensuing
from an acquisition, thus cannot be attributed to an asset ex
ante, and ii) in practical terms there has been no end to the
number of cases in which goodwill has suffered accelerated or
sudden impairment because it failed to demonstrate ex-post
justification.
Even the greatest mastery of these elements, from the quality
of environmental or social components, to the traceability of
projects’ funding, is to no avail if lacking a high degree of
transparency and gestures of commitment on the part of
issuers, and this at several levels.
-
Eligibility criteria: transparency as to the evaluation of
projects’ environmental and/or social quality, consultation
with independent experts and third party assurance of
veracity.
-
Traceability as to use of proceeds
-
Reporting on outcomes:
•
regular updates (at least annual) on the projects
actually financed with proceeds, including the
capital allocated to each;
•
qualitative and quantitative performance indicators
for measuring the real impact of investments with
respect to sustainable development goals (for
instance, tonnes of CO2 avoided by a green bond,
number of individuals gaining access to a health
service for a social bond etc.), and
•
third party assessment confirming the veracity of
information provided.
To take an example, Nordic Investment Bank (NIB) publishes a
complete list of each and every project financed through its
green bonds, and updates this inventory every time a project is
added. Information provided includes the goal of the project, its
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duration and the companies participating. A separate list tracks
the CO2 emissions avoided yearly thanks to these bond issues.
This level of transparency concerning project funding, which
still rare today, is essential for maintaining the value-added of
sustainability bonds for investors, which resides in the
measure of impact that they offer.
dimension comes into play), which is just as well, because
however mistaken and dangerous it is to design a market
theory based entirely on greed, it is delusional, and likely just
as dangerous, to try an found it on altruism alone. Human
nature being what it is, it is better to design incentives that
attempt to reconcile and overcome our contradictory
tendencies, rather than ignore them.
Each of these elements contributes to the establishment of a
credible market, and is thus championed by Mirova in all our
exchanges with issuers, although they are not qualifying
But before we come back to the mechanisms that might allow
us to resolve these contractions, let us consider what interests
this market holds for its two principal participants: issuers and
investors.
features per se in our analysis process at this time. This is a
requirement whose stringency will evolve alongside our
experience and observation of best practices.
These requirements are not, in fact cumulative, and are
assessed globally. We recognize that reporting elements of
this type can be onerous and time consuming to set up for
issuers. In order to lighten this load to a strict minimum at
issue, we encourage companies to move toward an integrated
reporting model (cf. the Integrated Reporting Initiative, to which
Mirova is also deeply committed). Such a model would make it
possible to fairly easily provide, as an appendix to the report, a
detailed description of green or social assets and liabilities. If
issuers committed to ensuring that such liabilities do not
exceed assets, investors would doubtlessly be significantly
less demanding concerning segregated accounting, second
opinions and ex ante descriptions of projects, as secure in their
certitude that all significant information would be available ex
post as part of the audited and certified annual report.
III.
What makes this market attractive?
To be sure, contributing to a more sustainable economy ought
to be a sufficient goal in and of itself. After all, without a
sustainable economy we are constantly facing the risk of a
Collapse, to borrow the title of Jared Diamond’s work, which
would, de facto, result in severe losses for all economic
agents. By investing in and for a sustainable economy we help
to ensure long term prosperity for all, something that ought to
be worth a few short-term opportunity costs by way of a tradeoff. Absolutely. However, we believe that the outcome of this
short versus long-term cost/benefit calculation can and should
be reinforced by creating a market infrastructure based on a
win-win approach. This is possible because the economy is not
a zero-sum game (even, or rather especially, when the time
The market’s appeal from an investor standpoint
To date, the green and social bond market seems to offer
nothing but upside from an investor perspective. Issuers have
more or less entirely abandoned the idea of structured
products with variable coupons contingent on environmental or
social goals, and have largely floated ‘vanilla’ instruments on
the market. Returns are determined by the overall credit rating
of the issuer. Thus investors receive the same rate of return,
for a given issuer, whether the bond is green or social or
neither. This explains why these issues have met with such
great success; outside the space of SRI investors,
conventional investors also subscribe on the basis of ordinary
risk/return calculations. While especially high levels of demand
at issuance can sometimes create a slightly less attractive
spread than traditional bonds exhibit, its effect is generally
minimal, with little impact on their overall yield.
Thus we are currently witnessing the development of a market
that offers investors environmental and social benefits without
sacrificing financial returns.
To an issuer-by-issuer analysis, it is worthwhile to add an
overview of the market as a whole. The underlying question
remains: ‘if, as an investor, I allocate part of my holdings to this
new asset class consisting of green and social bonds, what is
likely to change about the overall return I can expect from the
bond markets?’
The following snapshot, which we offer here in response to this
question, dates from 15 September, and is presented by way
of example only. In addition to changes in general market
conditions, we have already made clear that the market for
sustainability bonds is rapidly evolving, and that we should
expect the snapshot we might take a year from now to look
extremely different.
These precautionary statements notwithstanding, it is
interesting to compare the financial characteristics of the
current supply of green and social bond issues greater than
10
USD 200 million with those of traditional indices. The result
shows a very marginally lower return for green and social
bonds (1.46%) as compared to the iBoxx Overall index
(1.54%), due to an average maturity that is significantly lower
(5.38 years versus 6.96 years).
Figure 7. Financial characteristics of the iBoxx Overall
compared to green and social bonds
The portion of this market issued by development banks and
agencies shows characteristics similar to the iBoxx Supra,
which is to say, much like the returns offered by AAA issuers in
terms of credit rating. This is unsurprising, given the significant
overlap among these issuers at the moment. More interesting
is the non-financial corporate component of green and social
bonds. We arrive at an average rating of A in terms of credit
rating, and thus a relatively favourable financial profile
compared to the comparable iBoxx ratings class, as corporate
green bonds have a high proportion of utilities that are
relatively highly rated. Their yield is significantly higher, as
compensation for a longer average maturity. This longer
horizon is likely influenced by the duration of the underlying
projects the credit serves to finance.
Figure 9. Financial characteristics of iBoxx Corporates
index and the corporate portion of green and social
bonds
Source: Mirova / Natixis Global Market Research, 2014.
The financial characteristics of green and social bonds are
somewhat different from those of a broad based ‘investment
grade’ bond index. The dissimilarities can be attributed to the
current profile of the sustainability bond market, populated
almost entirely by development banks, agencies, and only very
recently, corporations.
Figure 8. Comparative profile of securities in the iBoxx
Overall vs. green and social bonds
Source: Mirova / Natixis Global Market Research, 2014.
For an investor, the green and social bond market does indeed
have a distinctive issuer profile, though this is changing daily,
but offers financial characteristics that are very similar to those
exhibited by the bond market as a whole.
The appeal from an issuer standpoint
Because the issuance of green or social bonds does not
currently reduce financing costs, it may seem surprising that
issuers would commit to the substantial constraints associated
with such bonds in terms of internal organization, reporting and
consulting simply to raise funds they could have obtained on
the conventional market by offering similar yields, without all
the hassle.
If not financial motives, what does drive issuers? First of all,
beyond the mere image aspect, issuing bonds with
environmental or social characteristics sends a signal
regarding commitment to sustainability that is more concrete
than publishing a sustainable development report.
Source: Mirova / Natixis Global Market Research, 2014.
Of course, it would not do for these specialized issues to let us
ignore the other kinds. To this effect, there might be a way to
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encourage development banks to adopt a methodology
whereby they only issue sustainability bonds, which would be
consistent with their mission.
where possible, the social and/or environmental benefits
resulting from the underlying projects. Issuers, on the other
hand, may be reluctant to incur large additional reporting costs.
The second motive, while not strictly financial, involves a
calculated effort on the part of issuers not to cut themselves off
from certain investors. SRI investors employ environmental
and social standards, and thus sustainability bonds are a way
of attracting investment to fund specific projects that a
company would not have been eligible for with a general
corporate purpose issue.
True, the market appears to have found an equilibrium point at
the moment: brand image benefits for both parties, financing
costs that are identical or even slightly lower, along with
reporting costs that are manageable for issuers, while
investors receive yields around those of conventional bonds.
This equilibrium makes us comfortable assuming that the
market will continue to grow. However, it is not impossible that
this growth may produce large spreads when green or social
bonds are issued, or that the bond curve may come to favour
issuers of this type of bond.
Thus, while certain investors do not wish to finance nuclear
power or fossil fuels, issuers with a presence in these sectors
may still be able to reach out to them by offering such
investors an opportunity to finance only the company’s
development of renewable energy.
Some observers have criticised green bonds for this very
reason, saying they might become a means for certain players
to secure SRI financing that they would otherwise not be
eligible for. We disagree. First of all, the reasoning doesn’t
apply to equity funds, for which project finance is irrelevant.
Secondly, because if green and social bonds work for these
issuers as for any other, this will eventually translate in the
market as a difference in financing costs. Capital that can be
raised from the entire pool of investors becomes less costly
than financing that can draw on only a subset of them. If so,
the market will have accomplished its fundamental role: it will
assign a price (indirectly and not directly as does a Carbon
Exchange) to social and environmental benefits. By reducing
the cost of financing green and social projects, this process will
lower the profitability required of them as compared to other
types, thereby contributing to the development of a sustainable
economy. Rather than fret about possible negative effects,
socially responsible investors should be doing everything they
can to support the healthy development of this market; the
more it grows, the greater its positive impact on the financing
costs for projects of social and environmental benefit will be.
We are by no means there yet. But it is possible, right now, to
design a market infrastructure that would allow us to overcome
this easily anticipated obstacle and accelerate the market’s
development. Since, green and social bonds contribute to the
general interest by reducing systemic risks such as climate
change, it seems appropriate that regulations, notably the
Solvency Directive, move to treat them more favourably. By
aligning the interests of society, those of corporations
developing green or social projects, and those of socially
responsible investors, new regulatory mechanisms would help
to create a market infrastructure strongly tipped in favour of
green and social bonds, and thus toward a multiplications of
the investments they finance. Of course, such a programme
cannot be envisaged without significant strengthening of
market standards for the evaluation of environmental and
social benefits; this could ultimately lead to a recognized label.
Is there a need for investments in transformation? Are there
financing issues at hand? If established on firm footing, the
green and social bond market can become an essential tool for
financing the energy transition; and for this reason we predict
that both its future and our own look brighter every day.
Moving towards a win-win situation
To place issuers and investors head to head is to invite a
confrontation between contradictory attitudes. Issuers are
hoping for their green or social projects to be financed at a
lesser cost than other kinds, whereas investors are looking to
hold out for comparable returns. Meanwhile, investors make
considerable demands in terms of reporting in order to forestall
the risk of weak issuance through due diligence procedures.
The most demanding among them ask issuers to quantify,
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