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  • When Rob Fernandez analyzes potential investments for

  • clients, he looks at what exactly it means for an

  • investment to be green.

  • We won't just buy a green labelled bond for clients just

  • because it says it's green.

  • More and more investors are interested in putting their

  • money to work in a way that will help combat the climate crisis.

  • And green bonds are the poster child of this kind of financing.

  • Environmental, social, and governance issues are here and

  • it matters.

  • And some big household names are getting into this space, like

  • Apple, Pepsi, the New York MTA. Plus, a handful of massive

  • banks. Not to mention governments around the world,

  • like China, Russia, the EU and and more. This kind of bond

  • issuance may top $650 billion in 2021. That's about eight to 10%

  • of all the bonds being issued around the world.

  • They're a growing part of the marketplace. They're going to

  • continue to grow. And I think that's going to be a major part

  • of the bond market.

  • So, there's a whole new bond market within the bond market.

  • Bonds as we know them work like this: An issuer, most often a

  • company or a government, raises money by offering bonds to

  • investors. They're basically IOUs, an exchange for getting

  • money up front, when you sell the bond, you pay the bond

  • holder back over a certain amount of time with interest.

  • Issuers use these bonds to raise money to invest in their

  • business, employees, infrastructure, anything you

  • name it.But green bonds are different.

  • The fundamental differences that it's about what it's financing,

  • first and foremost.

  • Money raised from these are earmarked for projects that are

  • positive for the environment.

  • The one key difference is that the issuer makes a non-binding

  • voluntary commitment to earmark the proceeds and use them for

  • specific environmentally-friendly

  • projects. So, it could be renewable energy, energy

  • efficient buildings, clean transportation, clean water, but

  • from a structure standpoint, they tend to be the same as the

  • traditional bonds that issuer would bring to market, minus the

  • green commitment.

  • The market here is bigger than just green bonds.

  • So, we saw last year about $490 billion of green, social and

  • sustainability bonds combined. This year, we're expecting about

  • $650 billion across those three categories.

  • And that's up 32% from 2020.

  • So, it's really it just keeps going.

  • Sustainable bonds break out into three categories: Green, social,

  • and sustainability.

  • Social bonds would be used primarily for social purposes.

  • It could be affordable housing, or micro finance.

  • And the sustainability bond category here basically means a

  • bond meets both green and social standards of issuance. The

  • biggest slice of the pie goes to green bonds with an expected

  • $375 billion of issuance in 2021.

  • In 2020, green bonds reached about $1 trillion USD at the end

  • of 2019.

  • And issuance is growing.

  • So it's a huge diverse mix. Banks, corporates and

  • governments. Anyone issuing or the ability to issue a bond is

  • issuing, especially when they have the eligible assets to do

  • so.

  • Most issuances so far have been considered investment grade.

  • That means independent rating agencies say those issuers are

  • most likely to repay their debts. The other side of the

  • bond market is more risky, often called high yield bonds or even

  • junk bonds. As for the buyers...

  • The buyers are the big pensions, the big asset managers. They are

  • the guys that really are putting pressure around the need for

  • more green investments. Retail investors are having a chance to

  • invest in muni green bonds, and that's not a common practice

  • that's happening globally.

  • I think that's going to be a major part of the bond market

  • where the retail investor can get some participation in that.

  • When it comes to accountability...

  • To date, it's been largely, you know, sort of a best practice,

  • document-driven market. But at this point, it's been a

  • regulatory light market for the most part. The green bond

  • principles, which are sort of a best practice document that was

  • put out by the International Capital Market Association.

  • For a green labeled bond, if the issuer is complying with the

  • principles, the green bond principles, then there's certain

  • parameters, certain guidelines they have to follow.

  • There's four core requirements that these bonds must meet, but

  • it's a non-binding voluntary commitment. First is use of

  • proceeds. It's basically the legal document that details how

  • the money raised will be used for green projects. And to

  • determine what's green, there's what's called a taxonomy.

  • The taxonomy's main objective is to help set the course on what

  • is green. You know, think of it as a dictionary or catalog of

  • what we mean by green.

  • The other core components include process for project

  • valuation and selection, management of proceeds, and

  • reporting. They're all interconnected. And essentially,

  • it advises issuers to keep up-to-date information on how

  • the money is being used and the project's environmental impact.

  • How are you going to manage the proceeds during the time of the

  • bond, you're going to use a tracking system or you're going

  • to ring-fence it, the proceeds? And of course, how will you

  • report on those is really the fundamentals on what the green

  • bond principles is trying to lay out.

  • All of this can be subject to second party opinions, external

  • reviews, and even verifications and certifications.

  • It's not one of the four key principles, but it's like it's

  • essentially a fifth and many issuers are doing it. And then

  • they'll oftentimes will bring an external reviewer in to provide

  • an opinion on the credentials of the offering and whether it

  • aligns with either the green bond principles.

  • And that's what investors actually rely on. They rely on

  • that verification that second party opinion, or certification

  • of the green bond.

  • Think of those stamps you may see on coffee or paper towels,

  • even ice cream, that are meant to signify to buyers that

  • whatever they're buying is ethical or sustainable.

  • When we pick up a product in the supermarket, and we make a

  • decision on whether we buy the same product, but of a different

  • brand, if one has been, you know, stamped by WWF or

  • Rainforest Alliance, we have a tendency to go, "I trust that

  • label." It is a marketing component that comes with an

  • assurance behind it that you can buy this product and know that

  • the due diligence has been done.

  • But issuers don't have to do this.

  • Well, investors in the U.S. market are gonna buy muni bonds,

  • whether they're green, or whether they're purple, or

  • whether they're pink. There is no guarantee what is being put

  • out actually is green.

  • Some muni bonds are getting that external review.

  • And so for example, like the New York MTA, they've issued green

  • bonds, and they've received a second party opinion.

  • They definitely wanted that extra credibility that it was

  • somebody else credible, authoritative voice saying that

  • this was green, not the MTA.

  • If the issuer decides to use all the money raised for something

  • else, there's no regulation in place to punish them.

  • Typically, we haven't seen sort of legal repercussions and bond

  • documents that say if the funds aren't used for specific

  • purposes, that it will be an event of default. So it's really

  • been, you know, what sort of the reputational impact there could

  • be.

  • It's why the rules of the game becomes so important and making

  • sure we have the right standard frameworks and verifications

  • happening.

  • Yeah, what's next for the sustainable green bond market? I

  • do think we're gonna see continue to issuance.

  • Plus, the market is evolving to include sustainability-linked

  • loans or bonds.

  • The interest rate is typically tied to the achievement of some

  • sort of sustainability target, the coupon could step up by 25

  • basis points, for example, if a targets not hit some point into

  • into the life of the bond.

  • It's almost as they're setting themselves up that they could

  • have a financial penalty, should they not achieve their goals.

  • So, there's only been about $15 to $20 billion of

  • sustainability-linked bonds to date, but the vast majority of

  • that has been in the last six months or so. So, a lot of

  • growth potential there, just still very early stages to kind

  • of size the market.

  • And we'll also see a rise in different labeled products

  • Like blue bonds or gender bonds

  • Blue bonds have been issued as a way to look at marine projects

  • or ocean or water projects. We've seen some gender bonds.

  • This is really looking at diversifying gender on boards or

  • in the workplace.

  • There was a big U.S. Bank last year that came to market with a

  • social bond they called a racial equity bond. You could see the

  • green, you know, the green label being used by issuers to support

  • the infrastructure spending from the Biden administration plan.

  • And therefore green bonds serves as a extremely useful tool in

  • moving large amounts of capital towards those projects, and

  • encourages, obviously this need to think about building out the

  • infrastructure that is going to prepare the United States for

  • the impacts of climate.

  • The only thing that's constant is change. And, so when you se

  • this new wave of green bonds and these topics arise on th

  • environmental social governanc side, it's great. It's great t

  • see that the growth is there an people are actually payin

  • attention to these details

When Rob Fernandez analyzes potential investments for

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B1 US bond green market sustainability proceeds social

How The $1 Trillion Market For ‘Green’ Bonds Is Changing Wall Street

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    joey joey posted on 2021/05/29
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