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How Covid-19 could supercharge the green bond market

image credit: Interview with Sean Kidney, CEO of Climate Bonds Initiative
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  • Jun 29, 2020

Work on mobilising the global bond market to finance the low carbon transition has received an unexpected boost at the hands of the Covid-19 pandemic. Green bond issues are vastly oversubscribed as investors show a clear preference for putting their money into shifting society in a new and better direction


RUSH TO GREEN Mounting evidence indicates that investors are favouring green bonds that not only make money but serve a social purpose

PANDEMIC BONDS Bonds issued to raise money for projects that are both environmentally sustainable and build resilience into the world economy are proving to be a smash hit

KEY QUOTE “The resilience agenda is adding meat to the debate around the Sustainable Development Goals and how you ensure that societies can respond to crises.”


It is becoming increasingly clear that sustainable finance will emerge from the pandemic in a position of relative strength. Evidence of the trend is provided by the green bond market. Bond issuance, after an initial pause in its fortunes as the Covid-19 health crisis took hold in March 2020, rebounded strongly, with volumes a month later just 16% below the previous year’s figures, according to data from the Climate Bonds Initiative (CBI).

“That’s not bad, considering we’re still in the middle of a crisis,” says Sean Kidney, the London-based CEO of the CBI, an investor-focused not-for-profit organisation that aims to mobilise the global bond market to finance the low-carbon transition.

“What is most interesting is that people are using the thematic bond market,” even during difficult market conditions, says Kidney. “That is a triumph for the green bond market. Investors like the dual aspect of a bond that raises money and makes a contribution to social purpose.”

He cites recent issues such as that from Switzerland-based telecoms firm Swisscom, which raised €500 million with a bond that was 14.5 times oversubscribed, enabling the issuer to pay investors 45 basis points (0.45%) less than expected, based on its previous non-green bonds. Another example comes from renewable power plant owner Iberdrola, with a €750 million bond that was 11 times oversubscribed, while a recent bond from a Chinese issuer paid a full 100 basis points less than the benchmark.

“That’s unheard of. This is happening in the middle of a crisis,” says Kidney. Investors are also reporting that green bonds are more liquid in the secondary bond market than conventional bonds. The secondary market is where issued bonds are bought and sold.

The green bond market captures bonds issued by borrowers who, typically, promise to ringfence the proceeds and use them to finance specific environmental (or social) objectives. It includes climate bonds, resilience bonds (designed to finance resilience to climate change or other environmental or societal threats), social bonds, and sustainability bonds.



The pandemic has triggered a new breed of these so-called use-of-proceeds bonds. “There’s been a massive growth in Covid-19 bonds,” says Kidney, noting the issuance of $10 billion of Covid-19 bonds in China alone in March. These range from a Chinese wind energy firm Longyuan Power, raising money to supply green power to locked-down customers, through to pharmaceutical company Pfizer’s $1.25 billion sustainability bond, part of the proceeds of which will be directed to its Covid-19 work, and a Covid-19 sovereign bond from Austria.

The issuance of pandemic bonds prompted bank HSBC to increase its forecast of social and sustainability bond issuance in 2020 by $25 billion to between $100 billion and $125 billion. According to asset firm AXA Investment Managers, issuance of Covid-19 bonds alone could reach $100 billion by the end of 2020.

Part of the CBI’s work is in assessing the credibility of use-of-proceeds bonds, and Kidney says it will be extending that work to the market’s new Covid-19 segment. “We’re looking at them through a couple of filters: are they supporting the right kinds of investment during a crisis; and are they consistent with the resilience we’re going to need [in the context of climate change]?”

Kidney does not expect the Covid-19 bond market to last beyond this year, but he notes that some of the public policy responses will have a clear application to society’s response to climate change. “The resilience agenda is adding meat to the debate around the Sustainable Development Goals and how you ensure that societies can respond to crises.”



“Over the next year, we will see a wide range of resilience bonds brought to market and sold as sustainable bonds in many more sectors than we’ve seen to date,” Kidney predicts. “From the investors’ perspective, it expands the [investible] universe and brings more liquidity.”

Thus far, Kidney is broadly pleased with the way governments already committed to taking action on climate change are keeping the issue in focus as they battle the impact of the pandemic. So, too, are the IMF, the European Central Bank and the World Bank, he says.

Kidney also notes that China, which has shown signs of reverting to pursuing high-carbon growth, has recently announced a New Infrastructure investment programme that is focused on electric vehicles, 5G networks, low-carbon transport and an upgraded electrical grid. “It does not include coal mines or plants at all,” Kidney says.

One unavoidable feature of the global economy that emerges from the pandemic will be considerably more debt – with sovereign wealth funds and companies alike needing to tap into the capital markets in enormous volume. Kidney is confident the money is there: “We still have more than enough capital to do everything we need to do. We still have vast pools of capital in zero or negative interest-rate bonds.

“Indebtedness is rising, and some institutions are constrained, but the capital is there.”



He says there will be a growing role for government and private investors to work together to find more innovative ways to fund investments in infrastructure to make economies more resilient to future pressures, whether from pandemics or climate change. “Off-balance sheet ways of achieving public policy objectives will become central, ” he says.

For example, Kidney says there is an urgent need for “every emerging market city outside China” to invest heavily in low-carbon transport, such as subways or light railways. They could follow the model of Hong Kong’s MTR, which funded arguably the most successful subway system in the world by exploiting its right of development above its subway stations. “Every emerging market city has appreciating property values. The property development model is eminently viable with a bit of regulatory help.”

Fundamentally, Kidney believes that both sovereign funds and corporates will find a more ready market for their debt if they can demonstrate that the proceeds will be put to sustainable purposes. “Will they be placed more rapidly if they are seen to be dealing with longer-term issues? I think yes, that’s what the green bond markets have shown us over the last five years.

“Investors like the idea of bonds that are also being seen to address long-term risk, shifting society in the right direction, and reducing the risk of future collapse. I think this is the inflection point that will really grow this market.”

TEXT Mark Nicholls

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