Market Comment: Green bonds to finance green initiatives

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Thanks to growing awareness and new funding sources, sustainability initiatives are gaining momentum across Europe.

Many countries and businesses have already incorporated sustainability targets into their economic strategies. One of the latest examples is from the EU, with the recent release of recommendations from the European Commission’s High Level Expert Group on Sustainable Finance. 

Roel Barnhoorn, ABN AMRO Fixed Income Thematic expert, believes that the new recommendations will result in a wave of sustainability projects in the financials sector, leading to further incorporation of environmental, social and governance (ESG) criteria in investment decisions. He notes, however, that an assessment regarding how a company is governed and whether it is delivering value for stakeholders and society, is not new, “but such an assessment is only now becoming a core choice for investors.”

Broadening of sustainability initiatives

Looking back on previous initiatives, Barnhoorn references the Paris agreement of December 2015 as “a milestone in the progression to a more sustainable world.” Over 170 countries have ratified the Paris agreement, showing their commitment to reduce carbon-dioxide emissions.

The European Commission (EC), for example, has pledged to reduce carbon-dioxide emissions by 40%, from 1999 levels, across all sectors of the economy by 2030. But, as Barnhoorn points out, some countries, such as Germany, are going even further: “Despite fragmented politics in Germany, the new German coalition is committed to aggressively tackling climate change,” he notes. “Germany is targeting carbon-dioxide emission cuts of 40% by 2020 – ten years ahead of the EC’s goal. And, by 2030, Germany aims for a cut of 55%.” Such changes are not cheap, however, and the role of the financials sector is increasingly important in meeting these targets.

Investment needed to meet targets

Barnhoorn points out that the EC has said that about EUR 180 billion in additional annual investment is necessary for Europe to achieve the goals specified by the Paris agreement. “Green bonds will be a key source of this funding,” he says.

Green bonds are bonds where the proceeds are designated to support sustainability projects, such as investing in buildings to increase energy efficiency, upgrading transportation systems to reduce carbon emissions or funding renewable energy generation and transmission systems. The largest issuers are governments and supranational agencies, followed by corporate issuers and banks.

Green bonds: financing sustainability projects

Total issuance of green bonds, as reported by the Climate Bonds Initiative (CBI), reached USD 155 billion in 2017, a significant increase from USD 87 billion in 2016. CBI estimates that green bond issuance could surpass USD 250 billion in 2018. “It is becoming a more robust and predictable asset class,” notes Barnhoorn, “and it is needed to finance society’s sustainable ambitions. At ABN AMRO, green bonds play an increasingly important role in our recommended investment strategies.”