Swedish Green Bond Market Calls for Diversification

    by Sanna Petersson, Captor

    The Swedish market for green bonds continues to grow. Several Swedish issuers have pioneered new segments of the market. Sweden saw, for example, the world’s first city to issue a green bond, the first corporate bond and most recently the first green covered bond. This positive development is in line with what is needed to achieve essential sustainability initiatives, not least the Paris Agreement.

    While we do talk much about the positive effects of the green bond market, the market sometimes creates challenges for investors. Hence, we need to discuss those issues so that the positive impact of green financing can expand even further.

    One challenge facing investors, especially in the Nordic market, is the low diversification among issuers and thus the projects funded. The Nordic market reached a total issued volume of approximately US$ 20 billion in 2017, which relates to a global green bond volume of nearly US$ 155.5 billion. About 33% of the worldwide issued volume comes from the renewable energy category and 29% from sustainable buildings, two sectors that also dominate in the Nordic market. The overweight of the real estate sector is probably partly caused by the fact that the industry already has functional and standardised environmental classification systems such as BREEAM, LEED and “Miljöbyggnad”.

    Another reason behind the low diversification in the market may be that many companies do not see how their business fit in the sustainable area. Therefore, I would say it is of extra importance to emphasise how green bonds are about allocating capital to green projects, not necessarily “green companies”.

    An inspirational example comes from Germany, with its long background in the coal industry. Through the initiative “Energiewende”, Germany decided to shift focus on renewable energy. Commerzbank recently issued its first green bond, which can be said to be in line with this transformation. The proceeds of the issue are earmarked for financing or refinancing renewable energy projects, more specifically, wind power and solar energy. Projects in this category accounted for 87% of all projects funded by green bonds in Germany in 2017, compared with 31% in the Nordic countries.

    In Sweden, needs to convert electricity production are different than in Germany, as carbon-free hydroelectric power and nuclear power are already the primary sources of energy today. However, Sweden cannot yet claim to run entirely fossil free, and therefore, there is room for improvement. Industrial companies could be more involved for instance. We have not seen much of this sector in the green bond market yet. One reason may be, as mentioned above, that they do not consider their activities as sustainable. To reduce the industry’s high emissions, it requires the development of new technologies, which I think could be funded by green bonds.

    The importance of a well-diversified green bond market

    In early October, IPCC report brought to the world the reality we are facing if we do not drastically reduce our emissions. The goal is to keep below the 1.5-degree temperature rise, a goal that nevertheless would lead to many critical problems. Should we, however, reach 2 degrees, the world would face a completely ice-free Arctic, coral reefs entirely lost and hundreds of millions of people without a chance to escape poverty due to climate-related risks. It is therefore crucial that we aim for a radical reduction in emissions. According to the IPCC 1.5 degrees will be reached by 2030 if we continue production and emissions as it is today, therefore to achieve the goal, the IPCC believes that we need a: “…rapid and far-reaching transitions in energy, land, urban infrastructure (including transports and buildings) and industrial systems. These system transitions are unprecedented in terms of scale, but not necessarily in terms of speed, and imply deep emission reductions in all sectors. ”

    We need many innovative solutions across all sectors of the market, which will also benefit the green bond market. Hopefully, the IPCC report can encourage companies looking at the opportunities to issue green bonds, but who may be unsure about how parts of their business can qualify as sustainable. One possible tool is to link the sustainable development goals (SDG) to the projects funded by the green bonds. The agenda encourages companies but also international organisations and state actors to contribute to this development. The 17 global goals and their sub-goals show that there is flexibility regarding the ways to contribute to sustainable development. The important thing is to be transparent and quantify impact as much as possible so that we can get a quality stamp on the green bond market. I believe that an increased diversification will further improve the efficiency of the green bond market, and thereby spread its positive effects.

    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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