Climate-aligned bonds have reached nearly US$600 billion, up 20 per cent on last year, with building related industries forming the fourth largest sector in this emerging asset class, according to the latest report on the debt financing instrument from HSBC and the Climate Bonds Initiative.

The total value of climate bonds was US$597.7 billion for the year, with labelled green bonds (those explicitly labelled green to increase investor certainty) rising in value to US$65.9 billion as of June 2014, Bonds and Climate Change: The State of the Market in 2015 found. Labelled green bonds have been enjoying continued success, with the 2013 issuance of $11 billion tripling in 2014 to $36.6 billion and expected to reach $70 billion for 2015, with the potential to climb as high as $100 billion.

But at US$597.7 billion, there’s still a long way to go, however, with the International Energy Agency estimating the cumulative investment in energy supply and efficiency needed to limit global warming to 2°C as being $53 trillion.

“Scaling up finance for the transition to a low-carbon economy is critical for addressing climate change,” managing director and head of the HSBC Climate Change Centre of Excellence Zoe Knight said.

“This report from HSBC and the Climate Bonds Initiative provides investors with an important insight into how to access climate related themes through the fixed income market.”

CBI chief executive Sean Kidney said investors representing $43 trillion in assets had signed a statement at a UN Climate Summit last year on the importance of tackling climate change.

Climate bonds were an attractive investment destination, he said.

“This report shows them that there’s a large and liquid $600 billion universe of bonds they can invest it – and it’s 90 per cent investment grade,” he said.

Climate-aligned bonds were grouped into six climate themes: Transport, Energy, Buildings and Industry, Agriculture and Forestry, Waste and Pollution, and Water.

Most climate bonds were for rail, with low carbon transport accounting for $418.8 billion (70 per cent), with clean energy at $118.4 billion (20 per cent). The remaining 10 per cent was shared between buildings and industry, agriculture and forestry, waste and pollution, and water, or were multi-sector bonds.

Green bonds for buildings

Energy efficiency, energy efficient appliances and lighting, LEDs, Energy Service Companies and low carbon buildings were the key sub themes for the buildings and industry sector – the fourth largest sector.

LG Electronics remained the largest issuer of bonds in the sector, with almost all of its product range certified with the Energy Star label.

Labelled green bonds comprised 45 per cent of the sector’s climate bonds, with European real estate corporations and US universities the main issuers.

This year also saw the launch of the Climate Bonds standard for low carbon buildings, with ANZ Bank the first to issue a green bond ($0.5 billion) certified under the property standard in late May, with Brookfield Place in Perth part of the portfolio.

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Green bonds reach developing markets

The report found that green bonds had started to get take-up in developing markets, led by China and India.

“Green bonds allow emerging economies to hit two birds with one stone by facilitating climate investment and the growth of a robust domestic debt capital market,” the report said.

Chinese yuan-denominated bonds accounted for nearly a third of the $600 billion universe, due to Chinese rail and hydro bonds. The report said that judging by the size of the unlabelled climate-aligned bond universe, there was potential for much more issuance from developing markets, particularly China.

In India, the first corporate green bond emerged from Yes Bank in February 2015, with a $161.5 million bond to finance renewable energy projects, which was followed by a larger $500 million green bond by the Export Import Bank of India for renewable energy and transport projects.

Food producer BRF kicked off the labelled green market in Brazil with the first Brazilian green bond in June 2015 – a €500m corporate issue successfully placed in the European market.

Mexico is set to also get on board, with a planned $105 million deal to be backed by energy efficiency loans to small-medium enterprises, credit enhanced with partial guarantees from the Inter-American Development Bank.

A 10-point plan for public policymakers

The report also features a 10-point plan for policymakers that Mr Kidney said would enable them to “take advantage of the growing interest in green bonds to finance their transitions to low-carbon and climate resilient economy”.

The agenda for the public sector comprises:

  • Strategic issuance from public entities: Public issuance can provide initial market deal flow and liquidity, engaging investors and educating them about the asset class
  • Strengthening planning and pipeline transparency of green projects: This allows potential green bond issuers, investors and regulators to plan ahead
  • Improving the risk-return profile of green bonds – credit enhancement: Credit enhancement should be selective, and aim to make green bonds fit institutional investors’ credit requirements
  • Tax incentives: Tax credit bonds are being used to encourage the development of bond markets in various countries around the world
  • Boosting demand –domestic fund mandates: Governments regularly provide guidance to public pension funds, sovereign wealth funds and the like about investment filters that will support a sustainable economy. The same can apply to green investments, including green bonds
  • Boosting demand and convening power – central banks: Central banks can use their balance sheets to purchase green bonds, including through quantitative easing, liquidity-providing operations and other mechanisms
  • Market integrity – Supporting standards development: The public sector can support efforts?to establish common green definitions, standards, verification, certification and enforcement processes for the green bond market.
  • Market creation and development – aggregation of small-scale green assets: Facilitating aggregation of green assets is crucial, as many low carbon investments are small-scale – for example rooftop solar PV
  • Financial regulatory measures are important: Regulatory measures can provide opportunities for positive incentives for green bonds
  • International financial cooperation: International collaboration is crucial to avoid fragmenting the global green bond market with incentive

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