Japan's Government Pension Investment Fund (GPIF), the world's biggest pension fund, invests heavily in green bonds. Yet this week its chief investment officer, Hiro Mizuno, said in an interview with the Financial Times that he is not convinced the asset class will enter the mainstream and risks becoming a "passing fad".
But, in our view, there are a number of trends that point to green bonds becoming more mainstream:
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Issuance continues to grow. From less than USD 20bn in 2013, annual issuance of bonds supporting specific environmental projects reached more than USD 160bn in 2018, and cumulative issuance is now USD 600bn, according to data from the Climate Bonds Initiative. This year it is expected to reach USD 200bn according to Moody's, the credit rating agency.
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The market is broadening. The green bond market started with bonds aimed at achieving climate change objectives, such as renewable energy. It is now broadening to encompass more of the UN's Sustainable Development Goals (SDGs). For example, blue bonds raise funds for projects aimed at SDG 14, to "conserve and sustainably use the ocean, seas and marine resources for sustainable development". Education bonds are aimed at SDG 4 – quality and inclusive education for all.
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Green bonds are becoming more cost effective. Mizuno's critique highlighted that green bonds are costlier and more complicated to arrange than conventional bonds and that more issuance like Verizon's USD 1bn green bond sale is needed. In February, Verizon's green bond issue was eight times oversubscribed. Such vibrant demand is becoming more commonplace. In May, Russian Railways issued the first green bond by a Russian company, which was priced at the lowest-ever yield for a Russian euro-denominated bond of any kind. In June, Chile's first sovereign green bond (USD 1.5bn) was 12.8 times oversubscribed, allowing the government to borrow at the lowest rate in its history: 3.5% for 30 years.
At a UN conference last November, Mizuno said that green bonds were a "lose-lose" proposition. In our view, investors in them benefit by getting full transparency on where their money is going, while companies benefit by gaining access to a different investor base – diversification of funding is a key consideration when seeking debt financing.
