Banks appetite for green bonds on the rise

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Sustainable finance has grown significantly in the wake of mounting political and public pressure, particularly after the Paris Climate Accords.

Banks issued a record number of green bonds in 2019, reflecting investors’ increased priority on environmental social governance (ESG) and the larger role banks will play as the economy transitions to low carbon.

According to Moody’s Analytics report, banks issued $121.8 billion in green, social and sustainability (GSS) bonds, a 41 per cent increase from the previous year. The bonds are designed to invest in environmentally friendly or socially beneficial projects, both new and existing.

Sustainable finance has grown significantly in the wake of mounting political and public pressure, particularly after the Paris Climate Accords. A cumulative $335 billion in GSS bonds have been issued since 2015 and the number is projected to grow even more.

Despite the rising numbers, the percentage of banks’ overall contributions has decreased as more government entities and companies issue their own GSS bonds. Moody’s projects that total combined GSS bond issuance could exceed $400 billion in 2020.

Asia Pacific banks, primarily commercial banks in China and Japan, were the largest issuers of green bonds, accounting for 37 per cent of the global total. European banks were the largest issuers of social and sustainability bonds with 42 per cent of the total issuance, largely in part to the EU’s sustainability policy agenda.

The Americas, the Middle East and Africa continue to lag behind these numbers at 10 and 1 per cent respectively of global issuance.

The number of banks issuing GSS bonds is expected to increase as investors place more emphasis on ESG considerations. Private investors are already showing a shift towards more sustainability driven portfolios, though the market may experience a temporary dip from the coronavirus.

Sustainability-linked bonds have become a popular method to include ESG standards while still retaining the flexibility of general corporate purposes borrowing. This flexibility makes loans a far more appealing alternative to use-of-proceeds GSS instruments from a treasury management perspective.

One potential downside that may emerge is a lack of transparency due to unclear sustainability targets. Banks could use these loans to tout a dedication to sustainability without disclosing how the money is being spent or what environmental and social achievements have actually been reached.

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