Green Bond Review, August 16 – Sweden Charges Ahead

    Stockholm (NordSIP) – As evidenced in last week’s review, the global green bond market won’t be reaching the extraordinary levels some champions were hoping for in 2018. While the first quarter was particularly disappointing, the second quarter did show signs of acceleration, and several actors see stronger demand in the second half of the year. Anna Reuterskiöld from Nordea’s Debt Capital Market Sustainable Bonds team points out how strongly the Swedish market has pushed ahead compared to other markets and walks us through some of the themes to watch out for in the next few months.

    Anna Reuterskiöld, Nordea Capital Markets

    According to numbers from Nordea, the share of green bonds relative to the total size of the bond market has stagnated in the major segments of the market after it reached around 5-6% in 2016. However, that proportion has grown considerably in the Swedish kronor space, and now reaches 11%, up from a just over 5% last year. As illustrated by the premium achieved in pre-summer issues, the popularity of green bonds among local institutional investors and asset managers is undoubtedly one of the factors that have contributed to Sweden’s green bond market growth.

    Looking ahead to the second half of 2018, Reuterskiöld highlights some of the critical questions the Nordea team is following. Amongst them the action plan that the European Commission has put together, which aims to redefine the green bond market. Reuterskiöld notes that most investors acknowledge the importance of the action plan for the green bond market. The key issue that will determine its success is the taxonomy for “how Green should be defined” together with the upcoming EU standards for Green bonds. Nordea is following the development closely “We have already seen the first four draft legislative proposals,” comments Reuterskiöld, “and the market will stay tuned while the work of the Technical Expert Group gets underway. As one of our Executive Advisers on Sustainability is on the EU expert working group for sustainable finance, we are doing what we can to contribute positively to this regulatory development.”

    Additionality will also continue to be a fundamental question in the market. How much environmental value do sustainable bonds bring, given that the projects are in many cases likely to be funded anyway? At Nordea, this discussion remains an important one for the green bond market. Reuterskiöld refers to dialogues with investors and issuers and adds: “Additionality is something that’s being frequently discussed, albeit mostly with the more advanced market participants. It touches the core of the Sustainable bond market’s existence – the value it brings, if any, is being questioned by some.” A key issue that is often brought up in this debate is the fact that sustainable bonds sit on the same balance sheet as regular bonds. Hence, the risk and pricing of sustainable bonds is expected, in theory, to be identical to other bonds from the same issuer (all else being equal), and traditional bond investors may doubt that the colour of the bond has any relevance. On the other hand, sustainable bond advocates argue that the signalling effect, the commitment the issuer makes both internally and externally, as well as the reputational benefits attached to green bonds are all non-financial benefits that ultimately “add” to the availability of capital for green projects. Nordea welcomes the discussion and Reuterskiöld adds: “We mustn’t forget that investors have investors of their own, whose potential appetite for green bonds has to be considered. There is pressure coming from many angles to create a more sustainable future, and capital markets has a vital role to play in this development.”

    Green bonds are different from other bonds in that the capital they raise is earmarked for environmental projects. This comes with specific reporting requirements to promote the transparency which is at the core of the Sustainable bond idea. “The topic of reporting has been one of the most discussed in recent months,” adds Reuterskiöld. “This illustrated one of the values that the Nordea team delivers to the market: forums where issuers and investors can communicate and understand each other’s point of views, be that IRL or by use of tech.”

    Also, sustainable bonds rely on independent certifications from qualified “external reviewers”. “External Reviewers are a cornerstone of the green bond market,” explains Reuterskiöld, “and this group is a low hanging fruit when it comes to reform, as it is not yet regulated. Standardisation and consolidation will be key to watch in this space going forward.”

    Ultimately, markets have a way to develop where demand meets supply. “The green bond market has always been able to surprise us with new deals and initiatives that require the market’s attention. It constitutes a growing, but not fully grown market, which we are excited to be part of,” concludes Reuterskiöld. We look forward to following up soon on what the autumn will bring both on the supply and on the regulatory side.


    Picture available on Pexels

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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