Green Bond Review, August 10 – Sobering up

Stockholm (NordSIP) –  This week, two market analysis issued by global rating agency Moody’s and Swedish bank SEB paint a somewhat muted picture of the green bond market for 2018. Optimistic expectations need to be taken down, and yet more clouds could appear on the horizon with upcoming regulatory hurdles, according to an earlier comment by HSBC.

Despite a strong second quarter, the weakness of the first quarter of 2018 will make it difficult for the green bond market to reach the targets that Moody’s and the investment community had initially set for the year. Based on figures and classification from the Climate Bonds Initiative Moody’s analysis shows that the green bond market rebounded in the second quarter of 2018 to US$44.9 billion (€38.6bn), making it the second highest quarter in terms of issuance, and 20% year-on-year. However, given the weakness of this year’s first quarter’s issuance of only US$31.9 billion, a decline compared to 2017, the first half of the year just grew just 7% year-on-year to US$76.7 billion. Based on that, Moody’s lowered its full-year issuance forecast from US$250 billion to US$175-200 billion, a 13-30% increase on 2017 instead of 60% previously expected.


SEB’s forecast of US$185 billion (€160bn) for this year’s total green bond issuance is within Moody’s range, while its estimates for the first half differ slightly. SEB reports US$47 billion for Q2 and US$36 billion for Q1, for a total of US$83 billion for the first half, just about US$6 billion above Moody’s estimate.

In July, SEB only recorded US$4 billion new issuance, which is less than in July 2017 (by “at least 40%”). For the bank, this set back is mostly due to factors affecting the overall bond market. “The decreasing growth rate overall for the market has its roots intertwined in a number of dynamics, most of which are not specific to green finance,” SEB said. “The overall bond market has slowed in 2018, and fickle market conditions have held back issuance globally in July.”

The bank remains positive for the rest of the year and expects the market to pick up. For Christopher Flensborg, head of climate and sustainable finance solutions at SEB: “What is also promising in the mid-term is the rise in corporate lending which we and a number of our peers are experiencing currently… Corporate treasurers are spending an increasing amount of time examining their funding options, hence, leading to prospects for larger corporate issuance ahead – and thereby also more attention to the green bond market.”

In a comment from HSBC published at the beginning of July, estimates and expectations are, again, somewhat different, albeit close. For Michael Ridley, bond analyst at HSBC, green bond issuance amounted to only US$71.4 billion in the first half, and his team expects the year’s figure to close between US$140 and US$180 billion.

In addition to weakness in the overall bond market, Ridley sees a threat from regulatory moves. “The European Commission is quickly advancing plans to regulate the market: an EU report on sustainable finance published in January 2018 was followed by an Action Plan in March and a new technical-expert group in June,” he reminds us.

While the legislation is originally supposed to be designed in a way that will promote green and sustainable finance, Ridley believes “The green-bond market could be hit if pension funds and other investors are told to include sustainability in their investment considerations and if the EU rules that some bonds are not sufficiently green for inclusion in a ‘green’ fund. EU policy may also be influenced by criticisms of green bonds by non-governmental organisations. Some NGOs are asking if green bonds achieve ‘additional’ emission reduction.”

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