Underwriters Pull Back, Slowing Rise of Green Bond Market

Despite investor interest in green bonds, experts say some issuers regard such offerings as more trouble than they’re worth.


Last year’s United Nations Climate Summit marked a high point in the optimism surrounding the green bond market. At the September 2014 gathering in New York, U.N. Secretary General Ban Ki-moon encouraged the private sector to boost investment in green bonds, which are intended to finance projects that combat climate change. Bank of America Corp. chairman and CEO Brian Moynihan and Jean-Yves Hocher, deputy CEO of corporate clients at French bank Crédit Agricole, committed to stepping up their firms’ underwriting of the instruments.

The excitement was warranted: In 2014, $36.6 billion in green bonds were issued, more than triple the total for the previous year, according to the Climate Bonds Initiative. The London-based nonprofit forecast a similarly steep trajectory for 2015, projecting that the green bond market would reach $100 billion by the end of this year.

Those high hopes have since faded — at least for now. This year’s Climate Week, taking place in New York through September 28, lacks events devoted to green bonds, though the topic is more likely to surface at the U.N. Climate Change Conference in Paris later this year. Green bond issuance for the first nine months of 2015 stands at only $25.6 billion. Subsectors that have lagged the worst this year include European and U.S. corporates, which need to ramp up their involvement for the market to reach CBI’s goal.

“We’d like to see a lot more [green bond] market activity,” says Stephanie Sfakianos, London-based head of sustainable capital markets at BNP Paribas. “Growth hasn’t been as fast as we would have liked.”

CBI co-founder and chief executive Sean Kidney counts himself similarly disappointed. Taking into account deals that are under development, Kidney expects a burst of issuance that will bring 2015’s figure to at least $50 billion and, he hopes, closer to $70 billion. But he says he’s “depressed” that the market has slowed to the point of doubling rather than tripling the previous year’s growth.

Investor interest in green bonds hasn’t flagged, Kidney and Sfakianos insist. Rather, they say, issuers have pulled back for reasons likely having to do with the perceived difficulty of issuing such bonds and a lack of financial reward for the extra work. In mid-September, CBI launched a three-person support services team to help educate would-be issuers about putting together a green bond offering. Kidney hopes this effort will show that the process needn’t be particularly time-consuming or expensive.


Marilyn Ceci, New York–based head of green bonds at J.P. Morgan, suspects that a new focus on standards in the green bond market partly explains issuers’ apparent skittishness. With input from its climate science advisory panel, CBI has developed the Climate Bond Standards and Certification Scheme, which offers guidelines for potential issuers and investors, and helps define what should count as green. The organization, which last year certified its first bond — an offering from National Australia Bank — is now ramping up certification for the broader market.

“I think some of the discussion and disagreement around standards can make this more challenging for some issuers,” Ceci says. “We should be mindful about not putting the cart before the horse. If you make it too confusing or too hard to come to market with what issuers believe is a green bond and what investors will buy as a green bond, you create hurdles to entering and growing the market. I think some issuers can pull back and get a little cautious.”

Ceci favors the approach recommended by the Green Bond Principles, which she coauthored with representatives from BofA and Crédit Agricole, among other financial institutions. “Make sure you have all the information there to enable investors to make decisions,” she says. “We’re not against standards by any means, but if you push them too far before the market’s mature enough, you run the risk of pressuring the market or slowing it.” For his part, Kidney says he’s hearing from issuers that they want more, not less, clarity around what constitutes a green bond.

Whatever the reason for the disconnect between green bond issuance and investor demand, a mid-September report from Barclays suggests that it’s affecting pricing in the secondary market. Credit analysts at the U.K. bank found that the constituents of the Barclays MSCI Global Green Bond Index trade 17 basis points tighter than bonds in the Barclays Global Credit Index.

“It’s certainly possible that this is something that’s driven by a mismatch” between demand and issuance, says Ryan Preclaw, a New York–based credit strategist at Barclays and a co-author of the report. “That mismatch is something that could be temporary, or it could be a more sustained future of the market. I would say we don’t know that yet.”

The fact that green bonds fetch a premium in the secondary market helps assuage Kidney’s concerns about growth. Especially for repeat issuers, he says, that trend should loudly signal investor interest and encourage the development of green bonds in the primary market. Other signs that bode well for the long term are the rise of market standards and the bubbling activity he’s seeing from emerging-markets issuers, along with the creation of green bond indexes, he adds.

“I think this year has ended up developing some of the foundations for a bigger market,” Kidney says. “But we still want to see the issuance happening.”