I thought I’d revisit the topic of green finance as a few related strands have crossed my desk and I’m sure my hordes of ‘green’ fans are missing me.
Before I get to the title of my piece, I want to mention the International Capital Market Association’s Green Bond Principles Resource Centre, launched this week. Among other things, it provides access to standardised Green bond disclosure templates for issuers and external reviewers. ICMA reckons the initiative will add to market transparency and support growth at issuer and investor ends. I’d say the market needs all the help it can get.
Green bond issuance, excluding US taxable munis, stands at a little over US$52bn year-to-date, according to Thomson Reuters data. People may laud year-on-year growth but by the same token Green bonds account for little more than 1% of international bond market new-issue volumes. Shouldn’t it be higher?
The market continues to have a slightly peculiar issuer profile: a lot of public finance borrowers (supranationals, government agencies and municipalities but not a single sovereign issuer as of today though I’m constantly told that’s coming), a smattering of real estate, some renewable energy, a bit of forestry, an odd-lot of banks, some incipient securitisation, a solid body of Swedish issuers issuing in krona, and a bunch of China issuance mainly in renminbi.
Peculiar because there’s almost no issuance from the industrials, utilities and energy sectors; companies you might have expected to have leapt through Green bond hoops to finance their green endeavours and gain an environmental imprimatur. This year we’ve had the likes of Iberdrola, Alliander, TenneT, Latvenergo and EDF. All repeat issuers; no new blood.
It’s also peculiar because the haul of issuers includes the US$2bn dual-tranche Green bond by Mexico City’s new airport. That’s odd in a different sort of way, in a not-seeing-the-wood-for-the-trees sort of way. The airport itself will have a carbon-neutral footprint and all sorts of environmental credentials and certifications. So what’s the issue? It’s a goddamned airport to be built on a 1,400-acre plot with an 8m-square-foot terminal and eventually expanding to six runways serving 120m people. That’s green? When clean coal is excluded from the labelled universe? Hmm…
Whither Green loans?
As my title suggests, I wanted to throw out there the topic of a Green syndicated loan market. It’s been bubbling under the radar for some time but I think if a workable framework can be developed it could go on to outstrip its bond cousin. A start has already been made in the go-go Schuldschein market.
Dutch issuers FrieslandCampina and TenneT tapped the market in April and May, respectively, for €300m each, while German wind turbine manufacturer Nordex used SSD in March to refinance its acquisition of Acciona Windpower with a €550m offering. (I questioned at the time whether acquisition finance could itself be green so I won’t go there again). The point is this German loan-style product has entered the green arena.
All banks have internal sustainability criteria that helps define their client engagement. And most have environmental loan programmes and are already financing retail and small business customers with loans for sustainable end-use, including in areas such as subsidised financing for renewable transformation. And some financial issuers are issuing Green bonds to finance green on-lending. So there’s a lot of stuff going on.
I was in Frankfurt a few weeks ago moderating a roundtable on SME funding and I introduced the subject of Green syndicated finance to our panel of mainly loan bankers. It was a great session, by the way, and I encourage you to read the report that’ll be on the IFR website early next week.
It was Reinhard Haas, Commerzbank’s global loans head, who pointed out one obvious issue in the loan market that doesn’t exist in the bond market: most syndicated bank finance is undrawn. If you have drawn facilities, it’s a simple task of utilising a template similar to Green Bond Principles and applying similar criteria.
But how can you deal with the issue of revolving credit facilities that have multiple uses? I suppose it’s no more than an issue of tracing use of proceeds. In some respects, this issue reminds me of the green-striped bond concept that Aaron Franklin, a capital markets lawyer at Latham & Watkins, wrote about back in the summer.
His idea to expand the use of the Green bond market was for an issuer who didn’t need a big size to use just a stated fraction of the total principal amount of new bond issuance or add-on fungible taps for environmental purposes. They would disclose use of that stated portion and seek relevant external verifications, while investors would account for their investment based on the stated portion of the Green bond at the same time benefiting from the greater liquidity of a larger-ticket bond.
I wonder if this concept would work in an undrawn loan context. On the basis that syndicated loan volumes year-to-date are close to US$2.8trn, and that banks could get in on the act in their own right as issuers to fund their own green on-lending, I’d say it has legs. Over time, I don’t see why we couldn’t have a vibrant Green syndicated loan market. I’ve reached out to ICMA and the LMA for feedback on work they’re doing in this area. I’ll update once I’ve heard back.
But wouldn’t the prospect of a Green bonds vs Green loans contest just be mouth-watering?
