Is interest in green bonds just hype?
It used to be that a CEO of a listed company only cared about two things: their share price and the next deal. These days, going green has become a third area of focus. Green bond issuance has reached a high of US$63 billion year-to-date as of the third quarter according to Moody’s. This far exceeds the total of US$42 billion in 2015. Chinese issuers have accounted for 32% of the total issuance volume globally as of Q3, the majority coming from financial institutions.
Ricco Zhang, director at the International Capital Markets Association (ICMA) explained the reason for the explosive growth of this market in China: “This is encouraged by regulations to be very honest. The Chinese authorities are well-aware of the pollution.” Speaking at a recent bond summit led by The Asset, Zhang notes that China “was obviously looking for financing” to address the problem.
In July of last year, the country issued its first green bond and in December they were the first country to issue official domestic rules on the green bond market.
Globally, large asset managers like Aberdeen, BlackRock and TIAA Global Asset Management - the largest holder of green bonds - retirement funds including CalSTRS, corporates such as Apple and private banks have invested in these environmentally-friendly securities. The UN Principles for Responsible Investment (UN PRI) Initiative listed 1,500 investor signatories representing approximately US$62 trillion in assets under management in April 2016.
Bernard Wee, executive director, Financial Markets Development and Payments and Technology Solutions at the Monetary Authority of Singapore cited at The Asset summit that out of the 40 large global asset managers that are in Singapore, 36 of them have signed up to the UN PRI. These investors have publicly committed to incorporate environmental, social and governance (ESG) factors into their investment decisions and green bonds meet these objectives.
Given the media frenzy over the green security, is the interest in green bonds in Asia just hype? The results of a poll by ABR finds that 49% of Asian G3 bond investors said they had invested or planned to invest in green bonds. This compares with only 20% that could say the same about project bonds.
Moreover, investors say they prefer green bonds by corporates (60%) the most. Financial institutions was the choice by a fifth (23%) of the respondents and multilateral institutions by 15% of respondents.
“We’ve been spreading the gospel,” says an Asian syndicate head at an international bank about green bond issuance in the region. “We’ve organized six events this year in Asia, in Singapore, Hong Kong and Korea on green bonds where we invite investors mostly, and a little bit of issuers, to understand the concept of green. Last year, we used to have 5 to 10 people joining these small lunches. This year, we’ve done three events in Singapore with more than 25 institutions every time.”
However, not all investors are optimistic citing price as a major concern. “I think it’s a marketing gimmick,” an international portfolio manager based in Singapore says. “I saw there was one issue, I think it was a Chinese issuer. But it was a pricing issue where we weren’t involved. At the end of the day, it comes down to: Does it fit the portfolio? Does it fit the investment returns?”
A Hong Kong-based manager at a local shop was more positive. When asked about the pricing compared to regular cash bonds he claimed it was more or less the same. However aside from the typical valuation metrics such as maturity, coupon, price and credit quality of the investment, green investors also need to evaluate the environmental rationale behind the projects the bonds will support.
The survey was part of the annual Asian G3 Bond Benchmark Review. The survey provides a wealth of data on the product needs of institutional investors and the market penetration of banks active in the Asian G3 bond market and Asian CDS space.
To read more about Asset Benchmark Research, please click here.
Additional reporting by Jacky Fung.
13 Dec 2016