Around the world, a growing trend towards investment in green bonds is taking place. Before we delve into this trend and what it means for the economy, let us take a moment to understand what green bonds are.
What are green bonds?
As the name suggests, green bonds are bonds or fixed income securities issued by corporates or governments for the purpose of using the bond proceeds to fund, directly or indirectly, environment friendly projects or “green projects”. The most common green industry is that of renewable energy such as solar, wind, geothermal, etc. Less common green industries include pollution control (waste water treatment, for example) and clean transportation, to name a few.
The governments and businesses from many countries, especially from the emerging markets in Asia, are starting to believe that renewable sources of energy are crucial to reducing dependence on carbon-based fuels, and as a result, a viable route to sustainable economic development. Investment in green projects would also provide them with funds to build and upgrade infrastructure, achieve greater energy efficiency, develop sustainable agriculture and manage land-use impacts. Consequently, there has been a spurt in investment in environment-related projects.
As can be seen from the graph, up until 2013 there had been no significant issuance of green bonds globally. However, in the last 5 years, there has been an exponential growth in investment in the sector, primarily due to increasing global awareness of and interest in environmental issues. The number of green bond issues has increased almost 10 times from just 43 in 2013 to 423 in 2018.
While the majority of issuance has been from US and Europe, Asian markets are quickly catching up. Data from Bank of America shows that $33 billion worth of green bonds were issued in Asia in 2017. This figure, the data suggests will rise to $56 billion in 2018 and to $175 billion in just four years.
The table below shows the ten largest green bond deals in 2018 in the Asian market.
While China is currently leading the race by a fair margin, other Asian countries are not far behind. Indonesia’s Sukuk has been the largest issue in 2018 so far, at $1.25 billion. Permodalan Nasional, a Malaysian government-controlled asset manager, issued a MYR 2 billion (~ $507 million) green bond in November 2017, marking the first use of ASEAN’s new Green Bond Standards.
In Hong Kong, 13 companies, including developer Swire Properties and Bank of China, issued $5 billion in green bonds. Hong Kong, aiming to become a hub for green finance, plans to issue up to HK$ 100 billion ($12.7 billion) in green bonds.
Hitachi Capital from Japan issued dollar-denominated green bonds in Hong Kong, targeting investors with an environmental, social and governance (ESG) focus. The funds raised will be used to finance renewable energy, water infrastructure and other sustainable projects in Hong Kong and mainland China.
The rapid growth of new bond issue in green projects is great news for the region, but quality and regulatory concerns must be tackled with caution. Third-party systems must be established to evaluate and inform investors about the usage and impact of funds raised through green bonds.