Green bond issuance by North American non-bank financial institutions (NBFIs), while starting from a small base, will likely continue to grow in 2021, driven by increased investor demand for sustainable investing to finance projects that help transition to a low-carbon economy.
Issuers that are able to capitalize on the growing demand for green bonds may see improved access to funding and investor diversification, often key analytical considerations for NBFIs, Fitch Ratings says.
Financial institutions’ lower direct environmental footprint relative to non-financial corporates may suggest less of an overall need for green bond issuance. That said, financial institutions can utilize green bond issuances to lend to or invest in green projects or take steps to reduce their own carbon emissions or other environmental impacts.
Green bond issuance by North American financial institutions was up to 22.6% ($13.9 billion) of total North American green bond issuance in 2020, from just 3.2% ($1.5 billion) in 2017, according to Climate Bond Initiative (CBI).
The credit performance of green bonds has historically been similar to non-green bonds given that credit risk is typically identical, as it is based on the issuer’s credit profile and not the use of proceeds. However, the demand for green bonds is growing rapidly, driving up prices and pushing down yields. This can reduce the cost of issuance if investors with sustainability goals lend to green projects at lower rates, which can result in a “greenium” or slight pricing advantage.
The early trading of Brookfield Asset Management’s (‘A-’/Stable) green bond Issued April 9, 2021 clearly suggests a premium with tighter spreads over a comparable maturity regular bond, although the data needs to be monitored over a longer period.
Green bond issuance can also highlight to investors an issuer’s focus on environment-related issues, which can potentially be positive from a reputational perspective. However, green bonds have additional transaction costs that can offset funding benefits. Issuers must track, monitor and report on the use of proceeds, with increasing demand for third-party external verifications that the issuance is aligned with core green bond principles. Issuers can also face liability and reputational risks from greenwashing, or overstating the environmental impact of the activities financed by issuance.
North American NBFIs with recent green bond issuance include Canadian pension fund Caisse de dépôt et placement du Québec (‘AAA’/Stable), which launched a $1.0 billion green bond in May 2021, after setting a target in 2017 to reduce its carbon intensity per dollar invested by 25% by 2025. This follows a $500 million issuance from fellow-Canadian investment firm Brookfield Asset Management in April 2021.
Hannon Armstrong Sustainable Infrastructure (‘BB+’/Stable) closed on a $400 million senior unsecured sustainability linked revolving credit facility in April 2021, on top of its $1.4 billion in outstanding green bonds. Hannon also has $150 million of “green” convertible debt that does not fall under ICMS’s green bond principles.
Total green bond issuance in North America was $61.5 billion in 2020, up 3% from the prior year, according to CBI. Issuances tied to low-carbon buildings led 2020 issuance, followed by issuances related to reduced energy consumption and low-carbon transportation, which both grew from the prior year.
The size of individual issuances also continues to grow, with deals of $500 million or more accounting for more than 47% of issuance in 2020, up from 31% in 2019, driven by public sector issuers financing infrastructure projects, according to CBI.
Public sector issuance also grew in 2020, as these projects tend to be longer term in nature and less vulnerable to the pandemic’s economic fallout. This is expected to continue as public sector issuers pursue sustainability initiatives and policymakers utilize private capital to finance green platforms.
Public sector issuance also grew in 2020, as these projects tend to be longer term in nature and less vulnerable to the pandemic’s economic fallout. This is expected to continue as public sector issuers pursue sustainability initiatives and policymakers utilize private capital to finance green platforms.
