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Green bonds poised to be $1 trillion market by 2020

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The climate bond market has jumped 10-fold in two years to $38 billion. By 2020, it could be worth $1 trillion a year, as wind and solar companies, property investors and local, state and national governments tap soaring demand for clean investments.

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It could well be the fastest growing financial market in the world – green bonds. Just three years ago, it was barely visible; a play-thing of a few international development banks.

Last year, the market grew three-fold to $38 billion. By 2020, predicts Sean Kidney, the co-founder of Climate Bonds initiative, the market could be worth more than $1 trillion a single year.

That will go a large way to finding the $46 trillion that the International Energy Agency says is needed to fund the transformation of the world’s energy systems from dirty to clean.

In recent months, developers of large-scale wind and solar projects have been rushing to the new green bond market, as an alternative to the traditional equity and debt markets.

SunEdison recently tapped the market with an $800 million green bond to finance its purchase of First Wind, a deal that makes it the largest renewable energy developer in the world.

Warren Buffett’s Berskshire Hathaway in February was in the market for a $325 million climate bond to fund 579MW of solar projects through SolarStar Funding.

A week earlier, the European Investment Bank tapped the market for a £339.2 million climate bond to help fund the transmission link for Gwynt y Mor, the second biggest offshore wind farm in the world.

Last year, SolarCity issued $200 million of asset-linked retail bonds to help fund the rollout of its rooftop solar leasing model. Its target market was small investors, a market that has been tapped at a smaller level by wind and solar developers in the UK.

US municipals are also tapping the green bond market, and big banks are also making a move. Barclays announced in September that it would invest at least £1 billion equivalent in green bonds over the year. Deutsche Bank is aiming to boost its investment in green bonds from €200 million to over €1 billion. Group treasurer Alexander von zur Muehlen said “green securities” had become viable and prudent liquidity buffer investments.

Citigroup is also investing $100 billion in the green space, although not all of it in green bonds. Michael Eckhart, a Citigroup managing director, predicts the market for green bonds will grow to $100 billion in 2015.

By 2020, Sean Kidney told a forum at the World Energy Future conference in Abu Dhabi in late January, that could spin out to a $1 trillion a year market. “We are going for $100 billion in 2015, for $300 billion in 2018, and $1 trillion in 2020,” he said.

Green bonds are expected to provide a large part of the estimated $100 billion financing needed for India’s push to 165GW of new renewable energy (wind and solar) by 2022. Last month, Yes bank issued the country’s first green bond, an $80 million issue to finance various solar, wind, hydro, biomass, and energy efficiency projects.

In the UK, the Labour party has announced they will ask the UK’s Green Investment Bank to use green retail bonds to finance more solar, wind and other clean energy projects.

In Australia, the market is also emerging. Last December, National Australia Bank (NAB) offered a $150 million bond to help finance $1.5 billion of investments in 17 different wind and solar projects. The raising was doubled to $300 million after strong investment demand.

As we reported then, the NAB bond came hot on the heels of Australia’s first green bond from property group Stockland in November. The World Bank had previously raised $A300 million in the first green bond denominated in Australian dollars.

The Financial Times recently wrote an analysis that suggested green bonds were now attractive to ore investors.

“At least two factors mean green bonds could yet end up outperforming other bonds. The first — negative — reason is that the market’s small size and novelty means liquidity is stickier: green bonds would not be the easiest to sell in a panic. A second — more positive — reason is that green bond owners are likely to be long-term investors holding them to maturity.

“A recent Bank of America Merrill Lynch note argued that green bond prices were not only similar to non-green bonds, they were also “less volatile than counterparts, which may be driven by their perceived safety and longer-term investor base with lower churn rates”.

Another analysis in the markets publication Global Capital said that the “cynics had been silenced” and green bonds had joined the mainstream.

“Whereas a year ago the mention of ‘Green’ or ‘SRI’ tended to bring a roll of the eyes and accusations of hype, fad or window dressing from all but the sector’s most ardent believers, 2014 saw global bond teams swing behind the movement.”

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  • john

    If Australia is to replace most of the 90 GW gen sets this would be a lot of money.
    So lets say 30 GW as a start, that is 30,000,000,000 kilowatts.
    Now if done by PV as an example at $1200 a Kw then the figure is 30 billion * 1200 a rather large $36,000 billion or $36 trillion using the US method of billion.
    Considering the investment is long term considering that the cost of fuel is zero then there is a very good business case to get into this market.
    Who is the most astute money user in the world one Warren Buffett and he has an interest.
    Considering everyone in money wishes to use his name to leverage their product I think the company he runs has standing.
    Bringing this all back to the homeowner level, investment in RE will return at least 6%, where PV works well and better depending on the amount of home use so this is one very simple easy investment.
    With funds raised to do PPA’s the level of return will be well above for anyone who gets into this market.

    • juxx0r

      You’re out by a factor of 1000.

      • john

        cripes not 30 billion ?

    • Raahul Kumar

      The Beyond Zero Emissions Stationary Energy Plan is an excellent start to answer the same question, how much would it cost to power Australia from zero carbon sources?

      http://energy.unimelb.edu.au/files/site1/docs/pubs/ZCA2020_Stationary_Energy_Report_v1.pdf

      The total cost of implementing the plan would be $370 billion, which if you had gotten your order of magnitudes right would have been in very close agreement with your back of the envelope calculation.

      The health benefits from closing down coal, and the adverse consequences of climate change make this a net saving overall.

      • john

        I take your point I did mess up one must be very careful in using such large figures I messed up between giga mega and kilo my appologies

        • Just use Frink. I can’t keep track of unit conversions myself, it’s too hard to expect the brain to keep track of those details. Make life easier.

          http://frinklang.org/fsp/frink.fsp

          Let the machine do it for you.

      • Mags

        And benefits in so many areas, like jobs, health, the future environment, and so on. But we need some vision here in Oz, and that is lacking right now!

        • john

          Forward vision ?
          In Australia ?
          No sorry we do not do any planning in Australia other that which moron team is playing which moron team in some idiot game anytime soon or that is if they have a team that are not on drug charges what a joke.
          Sorry I am being very obtuse about the national game in two states

          • Mags

            Yup, it seems that way. But it doesn’t have to be, we need to inform and encourage more and more people to take notice of what is happening. Falling share prices in the resources area helps, of course.

            I like to tell my friends how much I have made from Mighty River and Meridian energy (both NZ renewable companies) in the last year and it is way way way more than they have made with their BHPs and RIOs. They will listen eventually.

          • john

            Yes I seem to remember hearing about MIghty River just today.
            Underlying it all when the input cost of energy is zero the long term cost of energy is very low.

          • Mags

            Correct, it is just the capital outlay. But years of free energy thereafter. Too hard for our pollies to work out it seems!

          • john

            Well perhaps they do see it but are not able to come to terms with the upfront cost to invest when we already have an energy system that delivers.
            In the long term it is a no brainer but getting over the expend in the short term is the hurdle too high to jump over I am afraid.
            As we move forward with ever falling returns to the old tech gen sets it is becoming very obvious that adopting RE is the way we will move.
            What I mean is the high returns have evaporated even with our very small penetration of RE so much so that the highest transmission cost of power against the lowest cost is getting toward the same value.
            This has caused the closure of a few old gen sets.
            The difference between high price for dispatch and lowest is very narrow.

          • Nos? My financial adviser keeps trying to sell me on fossil fuel industries. Be good to have some data as ammo.

          • Mags

            Well from 2011 to 2015 the materials index (which includes our resources companies) and the energy sector have both dropped 60%.

            I can only get data on my two favoured alternatives for a year as they haven’t been public for long, but Mighty River has gone up 85% in a year and Meridian up 107%. Don’t buy Meridian just this minute as it is an instalment share and the second instalment is due in May so better to buy after that. But Mighty River is a go right now, though not cheap after it’s big rise.

            Maybe you need to get a new financial advisor!! Actually my real advice is do it yourself. Much cheaper, and you will understand what you are doing, and no one will make money for you, better than you will make it for yourself!! I ducked out of advisors ten years ago, and have done heaps better without and really enjoy understanding what I am doing and what is going on! Good luck!

          • Those are some impressive returns, but people have made billions over the years investing in fossil fuels like Exxon and Mobil etc.

            But good to have some actual names I can refer him to when we discuss oil stocks vs green energy sources.

          • Mags

            Indeed, you are right, but the secret of successful investing is to move with the times and not get attached to investments that have been good in the past, but had their day.

          • In putting forward a case, what companies do you tend to invest in? Are you using the exact same standards you would use for any company:

            Debt, P/E ratio etc etc, or do you use any new indicators? And which companies are you rating highly at the moment? I like solar companies based in Bharat, for obvious reasons given the large solar build there.

            Also in Asia and Africa in general, for similar reasons.

        • Next election, Abbott’s got some poor poll numbers, and the State Governments are saying they will build lots of solar. QLD Labour says 50% Solar. Give it 2 years for the next one.

      • john

        I had a look at the post from the person who put up the link to brave new something or other.
        The story when looking at the site is we should all move to Fukushima because the radiation levels are good for you.
        You will not get cancer evidently.
        I notice he removed his post hmm such is life however his link does pose a question about how it is not a good idea to use RE but one must use Nuclear which is a pretty good question.
        Except for the end results of using nuke however I would not recommend moving to Fukushima as a life style choice.

        • I think that’s a bit offtopic when we’re discussing green bonds, since that’s more with what Beyond Zero Emissions is suggesting.

          I still think their plan is the best one advanced to date, and is a good solid roadmap for the Greens and Labour to adopt, and commit to a 100% renewable future for Australia.

  • adam

    so what’s the difference between a green bond and a regular old bond – why do we need this specific type? Surely a company (say e.g., a renewable company) issues standard bonds you can call them whatever you want but they’re still just corporate bonds..?

    did the SunEdison-FirstWind “bond” feature FITC benefits?

    • No difference at all. In the same way that all shares are shares, but some people like to divide them into industrials, miners, and then further into sub-sections. Yes, presumably, on the FITC.

  • While it’s great that a lot of much needed investment is going into renewable energy, let’s not forgot (because it’s not mentioned in the article at all, and not in very many I’ve seen on green bonds), that the bond market can crash. Green bonds would not be immune to this. Indeed, there have been plenty of warnings recently about the bond market.

    If I understand correctly, the crash of 1987 had a quite a lot to do with bonds. Most of the people investing now are too young to remember and think bonds are very safe. If green bonds do reach a trillion dollars a year, would that constitute a bubble?

    Or we could say, if a trillion dollars a year are invested, the renewable assets (solar panels, wind farms etc) just like real estate will still exist after a market crash, so that’s good, but investors will lose out, which is not so good.

    I think we just need to remember that, although there is huge incentive to develop renewables quickly because of climate change, we are still dealing with the realities of capitalism here. Also, as recent history (dotcom bubble, then sub-prime/housing bubble) has shown, we should be careful about what the investment banks are doing, especially when it’s turning into “the fastest growing financial market in the world.”