The green bonds market has trebled in size this year, with the Climate Bonds Initiative reporting the market has $34.3 billion in issues. The news comes as The Peoples Bank of China chief economist Ma Jung this week released a report on developing green financing and green bonds for China that maps out the mechanisms for the massive development challenges facing the nation to be potentially tackled with the assistance of climate-friendly finance models.

The report is the result of a series of working groups that have included Climate Bonds Initiative chief Sean Kidney and Simon Zadek, co-director of the United Nations Environment Programme Inquiry into the Design of a Sustainable Financial System.

It outlines proposals for green banks, green bonds, green lending and also differential risk weighting for green loans on bank balance sheets.

In a posting to the Climate Bond Initiative blog, Mr Kidney said the growing trend of longer term tenor for green and climate bonds has interesting ramifications for the Chinese market, and potentially also for other economies that are concerned about the risk of market price collapses.

“Green bond buyers have a tendency to be ‘buy and hold’ investors, holding onto their investments for a longer time than with other bonds. An example: When the Korean Export Import Bank’s secondary market bond price collapsed in the middle of a Korean crisis, the green bond price held firm. There was minimal trading in the green bonds because investors were committed to them for more reasons than just the return on interest – bond issuers call that stickiness, a highly prized feature,” Mr Kidney said.

“For China an increase in tenor of debt would have macro-economic benefits. China’s debt market is currently 78 per cent short-dated debt – very high compared to 28 per cent in the US. As China moves to a more open market economy, having such short loans dominating is a recipe for volatility – it could lead to significant booms and busts as market conditions change and companies have to refinance every few years. Developing bond markets first with green products will skew them to long-dated investments, allowing a smoother transition from a highly centralised to a market economy: providing stability.”

Market has trebled this year

The green bonds market has trebled in size this year, with the CBI this week reporting the market has $34.3 billion in issues, almost all of them oversubscribed within hours of release.

The most recent issues included Norwegian utility NTE issuing a US$170 million of green bonds in three tranches – three, five and seven years – with floating coupons, to refinance existing debt on hydro projects acquired in 2004.

The use of climate bonds and green bonds to refinance existing debt is another trend in this evolving market, one that appears to sit side-by-side beautifully with the divestment movement.

The Hawaii State Department of Business, Economic Development and Tourism last week issued a US$150m of AAA-rated green asset-backed securities in two tranches. The first tranche for US$50m has an eight-year tenor and coupon of 1.467 per cent. The second tranche for US$100m has a 17-year tenor and 3.242 per cent coupon. Goldman Sachs and Citi were joint bookrunners.

These are the first asset-backed green municipal bonds in the United States, with the issue backed by a Green Infrastructure Fee that is being applied to the bills of customers of state-owned electricity utilities. It will be offset by a reduction in the Public Benefits Fee currently applied to electricity bills.

It’s fundamentally an on-bill financing model for development of green energy infrastructure, with proceeds of the green bond used to fund loans to consumers to cover the installation of solar PV panels and solar connectors such as storage, advanced inverters and monitoring devices.

The state government has extra-sweetened the whole deal by making interest from the bonds tax-free for investors.

“This is what we need to understand: there is really nothing new about this – the climate mitigation and adaptation challenge is essentially all about infrastructure financing, just that it’s also green. Great to see Hawaii connecting the dots on this,” Mr Kidney said.