What an amazing first quarter for the Swedish Green Bond market!
The value of green bonds issued in SEK during the first quarter of 2019 surpassed the value of all green bonds issued in SEK during 2017. At the end of 2018 Landshypotek issued the first covered bond in Sweden with forestry as security. Already, two more covered green bonds have been issued in the first quarter of 2019, SBAB’s 6th green bond and the Norwegian DNB Boligkreditt AS in SEK.
In the next couple of years, the Green Bond market will grow faster and faster
As long as demand outweighs supply on the green bond market, green bonds will continue to provide lower funding costs than their non-green counterparts. The market shows no signs of saturation, rather the opposite. Until now, there have not been any larger maturities, and what has been issued has largely contributed to the accumulated amount of outstanding green bonds. It is not until now, during 2019, that the first large number of maturities will occur. All in all, green bonds at a value of approximately 20 billion will mature during 2019 and the numbers look similar for 2020. This will further increase demand for green bonds.
One of the reasons for the limited supply of green bonds is the problem of defining and finding green projects. This is something that will become clearer and get standardized criteria when the EU taxonomy on sustainable funding comes into force.
A green bond
More than ten years ago, SEB together with the World Bank were the pioneers for the Green Bond. Together with a number of Swedish investors they developed the green bond market.
With ever-increasing awareness of environmental issues, the Green Bond raises industry engagement by encouraging investments in sustainable projects, processes and technologies. To get a better understanding of the underlying drivers and trends it is important to recognize the economic impact of climate stress.
A green bond is a bond specifically earmarked to be used for climate and environmental projects. This is a large and open definition and to create credibility with investors nearly all issued green bonds follows the Green Bond Principles (”GBP”). The GBP was developed by the trade association ICMA and is today considered the global industry standard. GBP’s four core pillars are:
- Use of Proceeds – the selection process of eligible Green Project categories
- Process for Project Evaluation and Selection – the process evaluation and selection
- Management of Proceeds – the process for a virtual green balance sheet to manage its proceeds of its green bonds
- Reporting – to report on its allocated processed and the environmental impact to the bond holders
Pressure has increased to mitigate climate risks
All sectors are searching for their role in contributing to the shift towards a low-carbon economy, and we believe that those who act first will be the winners. In the financial sector, the issue is not if we are going to have green financing, but when. The financial sector has a key role to play in contributing to the green transition. We see many strong initiatives which will contribute to the transition to a green economy, supported by ambitious climate targets, innovative laws and environmental taxes.
FCG has extensive experience in implementing financial regulations and can help you develop strategies and frameworks as well as provide advice on sustainability issues. FCG can also offer help in implementing a green bond framework in alignment with the GBP. Please contact us if you want to discuss this or learn more.