New buyers show growing taste for "Green bonds"

Reuters

By Jemima Kelly

LONDON (Reuters) - The first corporate "Green bonds" have drawn in a broader swathe of investors, with a spate of deals in November doubling the total raised in 2013 to nearly $10 billion and fuelling expectations that more will follow.

Proceeds from the bonds are used for schemes aimed at curbing greenhouse gas emissions or adapting to a warmer climate, and funding projects ranging from a hydroelectric power plant in Chile to an eco-farm in China.

They only form a fraction of the multi-trillion dollar global bond market, though, and until the recent launch of three company issues were the preserve of development banks.

But interest among new buyers, corporate bond investors and others is seen by many fund managers as a tipping point in the development of the still-niche sector, where keen pricing has combined with enthusiasm for ethical investing.

"The growth in itself is an important step because what you need for a market to become a serious alternative to traditional investment is liquidity," said Rikkert Scholten, a senior portfolio manager at Robeco, an asset manager.

Crucial for the more traditional bond investors was the price of the issues, which in the case of French power group EDF (PAR:EDF) and its record-breaking 1.4 billion euro ($1.9 billion) deal was broadly similar to its non-Green bonds.

Given the number of governments cutting their subsidies for renewable energy projects, high demand for Green bonds may come as a surprise to some. But even if subsidies are on the wane, companies must still finance their projects and if the price is right investors seem ready to put their money behind the bonds.

SOLID DEMAND

The others to issue in November were Bank of America Merrill Lynch (NYS:BAC) and Swedish property Group Vasakronan (VASA.UL). All three saw solid demand and raised a combined total equivalent to around $2.6 billion.

Societe Generale's Blaise Bourdy, who helped run EDF's Green bond issue, said the company wanted to diversify its investor base and "surf on this new wave" of demand for bonds that qualify as Socially Responsible Investing, or SRI, as ethical investment becomes more mainstream.

As a result of the success of the issue, Bourdy said he had received a number of requests to speak to other potential new corporate issuers in sectors such as utilities, telecoms and real estate.

The definition of what qualifies as a "Green bond" is not absolute, though. No single set of criteria has yet been agreed upon, though several competing versions exist, and many bonds are classed as "socially responsible" but are not marketed as "Green", even if they could have been.

It has also not yet been decided whether the bonds should be allowed to fund nuclear power projects which, though low-carbon, many SRI investors are wary of.

The market for climate-related bonds stands at $346 billion, but that for bonds that are labelled and marketed as Green is much smaller - currently just over $15 billion, according to the Climate Bonds Initiative, a non-profit group pushing for the introduction of universal standards for the eco-friendly bonds.

LONG-TERM

While 60 percent of the EDF issue was taken up by SRI investors, some, such as Jupiter Fund Management (LSE:JUP), which invested for the first time in a Green bond as part of EDF's issue, were not concerned about the label attached to it.

"The issuance of this bond highlighted the importance EDF's management places on sustainability and long-term planning," said Rhys Petheram, manager of Jupiter's Corporate Bond Fund.

Petheram added that he was not specifically "screening for green" but he would look out for future Green bond issues.

Societe Generale's Bourdy said investor demand had risen over the last 18 months and been growing since the first corporate SRI bond was successfully launched last October by Air Liquide (PAR:AI), a French industrial gas company.

Olga Dyakova, senior fund manager at the European Bank for Reconstruction and Development, said the run of new issues was welcome and that a tipping point had been reached.

"It clearly shows that the market has got to its critical mass and that it is starting to develop much faster," she said, even though the market was still some way off the $200 billion to $300 billion size flagged by the OECD last year as necessary to attract some institutional investors.

November's Green bond total accounts for more than half of that for 2013, which itself is more than every other year combined since the launch of 2008's inaugural World Bank issue, albeit still tiny compared with the $2.3 trillion in investment grade bond issuance in the year to October.

The drive for corporates to issue had been helped by the first-ever billion-dollar development bank Green bond in February, said Sean Kidney, co-founder and CEO of Climate Bonds Initiative, adding its popularity and size "made everyone notice".

The bond's success induced a "feverish" rush by bankers to get clients. "It's one of those things where everyone thinks the other is on to it so they get a bit panicked."

(Editing by Simon Jessop and Giles Elgood)

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