Green investment bonds growing but rules needed to boost appeal

Date: 29-May-15
Country: SPAIN
Author: Barbara Lewis and Susanna Twidale

Engie, the new name and logo of French utility GDF Suez, is pictured during the group's shareholders general meeting in Paris, France, April 28, 2015.
Photo: Benoit Tessier

Engie, the utility formerly known as GDF Suez, this month launched the biggest green bond to date and found it was three times over-subscribed, in what analysts say is a mere baby step towards the maturing of green investment.

A growing number of investors and energy firms say fixed-income bonds are a user-friendly way to raise the huge amounts of capital needed for a transition to lower carbon energy.

The overall size of the market for green bonds tripled last year and could triple again this year to reach around $100 billion, according to not-for-profit organization the Climate Policy Initiative.

So far, with the financial rewards for investors much the same as for corporate bonds from the regular commercial sector, the pull of green bonds so far is mainly ethical and they make up only around 0.2 percent of the bond market.

However, many advocates argue green bonds are even more solid than other kinds of bond because they help hedge against the risk from climate change and the "stranded asset" risk of fossil fuels from new regulations, litigation or the changing resource landscape.

But strong rules are needed before the green bond market can really take off, the industry says.

"For that share to grow significantly, voluntary guidelines that set out criteria for bonds labeled 'green' will likely have to achieve a greater level of standardization," Moody's ratings agency said in a report on Wednesday.

PRESSURE ON

The pressure is on as, from China to the European Union, companies and governments scramble for funding for renewable energy, whose upfront costs are extremely high.

"What is happening right now is an energy revolution," Brian Wolf of the Edison Electric Institute, which represents around 70 percent of the U.S. utility industry, said at an industry event in Barcelona. "It is clear that finance mechanisms must be established."

In an acknowledgement of the upheaval brought to the European utilities sector by the growth of renewables, such as wind and solar, GDF Suez renamed itself Engie this year and said it was embracing the energy transition.

Its 2.5 billion euro ($2.7 billion) green bond is to support renewable energy and energy efficiency.

Philipp Hauser, a vice president at Engie, said green bonds were obvious tools to raise the large amounts of capital needed, even if they required more rules to de-risk them.

Engie is based in France, which hosts U.N. talks to seek a new global climate change deal this year and whose government has been seeking to whip up investor enthusiasm for lower carbon.

France's national assembly has also passed a proposal on mandatory carbon footprinting for asset managers. If passed by the upper house, it would be the world's first such law.

As the momentum builds for a shift away from conventional investment, campaigners say it is a matter of time before the devaluation seen in European utilities is echoed in the oil and gas sector, for decades seen as a safe haven for long-term investors, such as pension funds.

The Institutional Investors Group on Climate Change (IIGCC), which represents investors responsible for more than 10 trillion euros in assets, said wholesale divestment was not yet the answer as some shares will perform more strongly than others.

"But it (the energy transition) does indicate investors need to take into account the growing range of risks associated with investments in fossil fuel companies and adjust strategies accordingly," Stephanie Pfeifer, chief executive of the IIGCC, said.

(Additional reporting by Michel Rose in Paris; Editing by Alison Williams)