The green bond market is booming. This segment, which is heavily tilted towards investment grade euro-denominated issues, has seen a significant increase in both corporate and sovereign issuance over the last year. In December 2019, the green bond market surpassed the EUR 500 billion mark, giving it a dominant position in the sustainable fixed income space. Bram Bos, Lead Portfolio Manager Green Bonds at NN Investment Partners discusses some of the recent interesting developments in this market.
ECB may move to green quantitative easing
Since Christine Lagarde took over as ECB president, there has been an ongoing debate on starting a green quantitative easing (QE) program. But how likely is this and what effect will it have on the green bond market? The ECB re-launched its QE program last month, with plans to purchase EUR 60 billion worth of bonds per month. However, there are a lot of limitations in the QE program. For example, only euro-denominated bonds are eligible, and the ECB is not allowed to hold more than one third of any individual issue. So although some of the bonds it buys currently may be green, this is probably more of a coincidence than a conscious choice. If we apply all the ECB’s restrictions to the green bond space, ‘only’ about EUR 50-80 billion is eligible. This rules out a full green QE as the market is still too small. But this does not mean that the ECB is going to do nothing.
NN IP believes that any steps the ECB takes will have a positive effect in terms of raising the profile of the green bond market. For example, it could communicate the volume of green bonds it purchases or set a minimum monthly purchase threshold and aim to increase this over time. This would give a very strong signal to the market on climate change. Such a move would also attract more issuers, which would further fuel the market’s growth.
New issue market firing on all cylinders
This is the second consecutive year that corporate issuers have dominated the green bond market. However, in contrast to 2018, in addition to the usual suspects (financials and utilities), more industrials, communications and technology issuers have launched inaugural green bonds. The first insurance companies also came to the market, while PepsiCo¹ expanded the relatively small consumer non-cyclical green bond sector.
Given the pipeline and underlying green assets, NN IP expects further diversification in the green bond space. Car manufacturers, for example, are transitioning to electric vehicles to conform with changing EU regulations and have a substantial green asset base. They too should be able to start issuing green bonds in the near future.
More European sovereign issuers next year
In 2019, sovereign issuance has also remained strong. The Netherlands became the first AAA-rated sovereign to enter the market in May, with the largest green bond issue to date (almost EUR 6 billion). France and Ireland also tapped the market this year. Sovereigns currently account for 24% of the euro green bond market. In 2020, other governments such as Germany, Italy, and Sweden are also expected to issue.
Germany has already announced plans to issue a EUR 10 billion green bond, while Italy and Sweden are in the process of selecting their eligible green assets. Lastly, it is worth keeping an eye on Poland, the “beating heart” of the European coal industry, to see how its new government sets out to tackle Silesia’s output and pursue its strategy towards climate change. NN IP has decided that Polish green government bonds are currently not credible and therefore not eligible for the green bond portfolio. This is mainly due to the lack of policy in Poland to phase out coal-fired electricity.
New sustainable labels – beware of greenwashing
In addition to green, social and sustainability bonds, which are already relatively well-defined bond types, this year more sustainable labels, such as “transition bonds” or “ESG-linked bonds” have started to emerge. However, due to their poor transparency, traceability and reporting on the use of proceeds, NN IP believes this new concept increases the potential for greenwashing. We already regard green bonds as transition bonds. The label of transition bond could also open the door to sectors, companies and activities that are brown and likely to remain brown. It could enable them to issue in the sustainable space – something which will not help us to achieve the goals laid out in the Paris Agreement. When it comes to sustainability-linked or SDG-linked bonds, the same concerns apply. Furthermore, as there are 17 SDG goals with 169 targets, every company can claim it is progressing on one of these targets in some way. So here too, the risk of greenwashing is high. Overall NN IP has a strong preference for the use-of-proceeds concept as applied to green bonds.
Looking ahead to 2020, Bram Bos, Lead Portfolio Manager Green Bonds at NN Investment Partners: “It is already clear that 2019 is going to be another record year in terms of new issuance, with the global green bond market surpassing the EUR 500 billion threshold at the beginning of December. Next year, we expect the market to continue to grow as investment increases in innovation, clean energy and smart cities. Corporates will lead this growth, but, as mentioned above, more sovereign issuers will also launch their green bond programs in 2020. The market is also likely to receive a further boost as a result of growing investor appetite for green products. By the end of 2020, we project the global green bond market to have reached EUR 800 billion.