Corporate green bond market to double in 2014

Record issues by large utilities will help push total volumes to $40bn as corporates catch up with development banks in using the environmentally-focused instrument.

The burgeoning green bond market is likely to reach a significant landmark this year, according to Standard & Poor’s.

In a study released this week, the rating agency forecasts that total issuance of the climate change-themed instrument will reach about $40 billion in 2014. About half of these proceeds – equal to the total green bond market last year – will be raised by large corporates, the report found.

This would be a marked change to previous years, when green bond issuance was largely dominated by multilateral development banks. These continue to be significant sponsors of the instrument: the European Investment Bank issued its largest-ever green bond, worth €2.6 billion, less than two weeks ago.

Yet large corporates are catching up. French utility GDF Suez issued a €2.5 billion green bond last week, doubling the record previously set by fellow power company EDF and raising nearly a third of the total €7.6 billion of corporate issuance since November last year. This followed a $1 billion 10-year bond sold by real estate investment business Unibail-Rodamco and a $1 billion 8.5-year bond issued by Spanish power business Iberdrola earlier in the year.

Standard & Poor’s believes the shift will continue, driven by large corporates’ desire to diversify their sources of funding as well as investor demand for socially- and environmentally-focused investments. The distinctive feature of green bonds relative to mainstream corporate issuance is that proceeds are ring-fenced to support projects addressing environmental issues.

Key to the future development of the market will be to open it to speculative-grade corporates and higher-rated companies with smaller funding needs, the report said. Aggregating smaller environmental projects into a larger offering, for example, was seen as a way to making them more palatable to larger investors.

A majority of green bonds have so far been issued in Europe, typically with an investment-grade rating of ‘A+’ or ‘A’. This year’s largest issues have all been oversubscribed by a factor of at least 3.0x.