Monday, June 29, 2015

WSJ: Green bond sales struggle


A flattening in “green bond” sales this year is highlighting the uncertainty facing the market for the debt, which is billed as financing projects that would mitigate climate change.
Green bonds have been sold all over the world in recent years and have helped pay for energy-efficient buildings, improvements to water and sewer systems and mass transit. As the market has grown, however, so have concerns about whether projects financed by green bonds are truly beneficial for the environment, and whether the companies, municipalities and banks that sell the bonds are using the money as promised.
The Climate Bonds Initiative, a nonprofit group in London that tracks the market, forecast $100 billion in new green bonds in 2015 after sales roughly tripled last year. But green-bond sales are about in line with last year’s pace, with $18.3 billion sold as of Wednesday, compared with $20 billion in the first half of last year, according to the group. About $37 billion of green bonds were sold last year in total.

The sluggish sales come as the broader debt market is booming, with investors snapping up bonds that offer higher yields than the low rates on safe-government debt. Some analysts say heavy demand for regular bonds could be dissuading some issuers from selling green bonds, which typically need additional effort to show a project is environmentally friendly.
Even so, the flat pace of sales in the first part of 2015 from a year ago has disappointed and flummoxed the debt’s supporters. “It’s been a bummer of a first quarter, and a bummer of a first five months really,” said Sean Kidney, the group’s chief executive officer, adding that green-bond sales still could hit $70 billion this year.

Bankers, investors and environmental groups are working to add clarity to the green-bond market. Mr. Kidney’s group is rolling out an advisory service for issuers who want to sell green bonds but are unfamiliar with the market. It is also putting out detailed criteria by sector for its own certification program, which is available for green bonds.
The Banking Environment Initiative, a group of financial institutions at the University of Cambridge Institute for Sustainability Leadership, said this month that it will work with other organizations to “support the emergence of industry-level consensus on standards” for green bonds.
And in March, the International Capital Market Association, a trade group for banks, issuers and asset managers, updated a set of voluntary green-bond guidelines that were initially released last year. The guidelines recommend that an outside party review whether a green bond is appropriate and suggest issuers regularly report on their project’s environmental impact.
The guidelines “focus on transparency and disclosure,” said Marilyn Ceci, head of green bonds at J.P. Morgan Chase & Co. That allows investors to make informed decisions about whether they want to purchase green bonds linked to a specific project.
The guidelines don't explicitly exclude any type of project from being financed with green bonds. Some investors have gone a step further. One investor group, coordinated by the nonprofit Ceres, supports adherence to the guidelines but said any project that helps perpetuate fossil-fuel uses or emissions might be better served with conventional bonds.
“The marketplace asks a lot of questions,” said David Sand, chief investment strategist at Community Capital Management, which manages $2 billion and was part of the Ceres group. “The last thing that anybody, investment banker or issuer, wants to do is come to market with something that doesn’t hold up to scrutiny.”
Mr. Kidney said he expected the green-bond numbers to be boosted this year by new issues from India and China, trends that haven’t significantly materialized so far. U.S. municipalities have stepped up their volume of sales, but he said relatively few U.S. corporations have ventured into the market.
To be sure, there are a few days left this month for deals before the first half of the year concludes, and new issuers have still tapped the market. Earlier in the year, German bank Berlin Hyp AG sold what was billed as the first green covered bond, a type of mortgage-backed security that is common in Europe. In the U.S., Morgan Stanley sold its first green bond, as did the city of Asheville, N.C.
Asheville was looking to sell a $50 million bond tied to water-system upgrades, including replacing asbestos water pipes with iron ones that help limit leaks, when its bankers at Bank of America Merrill Lynch suggested turning the bond green, said Barbara Whitehorn, the city’s chief financial officer.
The city provided a description of the environmental benefits of the upgrades, which were already completed, and plans to update investors on the “environmental sustainability” of its water system, according to a bond prospectus. Ms. Whitehorn said Asheville didn’t get an outside opinion on its green bond because it was “really clear in what the purpose was, that we’re conserving water.” But she said the city would consider it for a larger infrastructure project.
“I’m hoping over time that we’ll get some more clear criteria,” Ms. Whitehorn said. “I think the criteria right now are really amorphous. You can kind of say, ‘Sure, it’s green.’”