Big EU banks pile into Green Bonds, China poised to follow

Germany has burst onto the global green bond market this week with a huge inaugural offering from development bank KfW (Kredit für Wiederaufbau) with a volume of €1.5 billion – the largest Green Bond ever issued.

As the bank explained in a media release on Tuesday, the launch of the ‘Green Bond – Made by KfW’ directly connects its financing of climate protection projects and the capital market for the first time.

With a maturity of five years and an interest rate of 0.375 per cent, it says, “investors benefit from the excellent credit and sustainability ratings, as well as from the liquidity of KfW bonds, and simultaneously support climate and environmental protection.

And investors have, so far, seized the opportunity, with reports the bond was heavily oversubscribed, its orderbook reaching €2.65 billion within a short period of time.

“Our aim as a green bond issuer is to establish the same systematic dialogue with investors to get them engaged in climate protection finance,” said Gunther Braunig, the bank’s executive board member in charge of capital markets.

“I am convinced that capital can provide very strong stimuli for sustainable development. The more capital market participants are committed to responsible investment, the bigger the effect.”

The move coincides with an announcement on Tuesday from Swiss insurance giant, Zurich, that it would double its commitment to green bonds, to $2 billion.

Last November it gave a mandate to BlackRock to invest up to $1 billion in US denominated green bonds. The second billion will be invested in green bonds denominated in Euros, Sterling and Swiss Francs, reflecting the extent to which European green bond issuance has dominated the market over the past nine months.

Taking a slightly less optimistic line than KfW, Zurich says its commitment the Green Bonds is dependent on the market continuing to “develop in a positive fashion” and that its criteria for the use of proceeds as well as impact reporting continue to be met.

But according to predictions from Bloomberg New Energy Finance last month, the global market in debt securities for environmentally and socially minded investors is on track to surpass $40 billion in 2014, having soared past last year’s total of $14 billion to a total of green ‘labeled’ bonds issued in 2014 of $19.67 billion at the mid-way point.

In Australia, market analyst Sean Kidney, from the Climate Bonds Initiative, has predicted a domestic market of at least $1 billion by the end of 2014, after the April launch of the market saw 15 investors take up UniSuper’s offer of access to a $100 million share in the $300 million “Kangaroo” bonds issue.

Adding to this momentum is the People’s Bank of China, whose chief economist, Ma Jun, recently listed Green Bonds as one of around eight green finance measures he thought China needed to implement.

CBI’s Kidney, who attended China’s annual EcoForum conference in the city of Guyiang last week, says Ma Jun listed Green Bonds alongside a whole range of green growth policies, including tripling solar energy generation by 2017, carbon markets, Green investment banks, and green investor groups

Jun also said that to distinguish green bonds from other bonds they should have lower financing costs and greater government support, such as tax exemptions.

“Part of his rationale for green finance is that he believes there is currently little incentive for green investment in China, so polluting projects enjoy an oversupply of capital while environmentally friendly ones are faced with a severe capital shortage,” Kidney said in his blog on Tuesday.