News | ESG
More sovereign issuers could enter green bond arena in 2020
Green bond issuance stood at a record $250bn (£189.7bn) at the end of Decem- ber and is expected to grow exponentially in 2020 as several governments are plan- ning their debut fundraising in the market.
Corporates are playing a dominant role in this market issuing around three times more green bonds than sovereigns. While the green corporate bond market has traditionally been dominated by financial and utility companies, industrial and tech- nology firms are also increasing their share of the market. To date, a third of the cash raised through these products fund sources of clean energy. Just behind wind farms and solar parks are projects involving low carbon buildings (29%) and low carbon transport (20%), the Climate Bond Initia- tive says. Looking at corporate and sovereign issu- ance combined, the market has undergone
a significant transformation with the US (£28bn) and France (£18.2bn) overtaking China (£17.4bn) as the world’s largest green bond issuer, according to the Climate Bond Initiative’s calculations. Going forward, European issuers could claim a larger share of the market as sover- eign green bond issuance is set to become an increasingly important fixture in the market. In 2019, the Dutch treasury, the only AAA- rated sovereign in the market, raised a record €5.9bn (£4.9bn) through a green bond.
This was followed by German state-owned development bank KfW, which raised €3.3bn (£2.8bn).
The governments of France and Ireland also tapped sustainability-focused debt investors for capital in 2019. The German government has confirmed its plans to enter the market in 2020 with the launch of so called “twin bonds”, which will
be issued at the same time as conventional bonds with the same maturity and coupon. This allows investors to exchange them at any time to ensure liquidity and keep issu- ing costs low. Sovereign expansion into the green bond market conveniently coincides with Chris- tine Lagarde taking the reins of the Europe- an Central Bank (ECB). The former IMF chief has already initiated a discussion about the potential of green quantitative easing.
The ECB revived its QE programme in November, to the tune of €20bn (£16.8bn) a month, but the strict criteria for bond pur- chases could become an obstacle. For example, the ECB is not allowed to hold more than third of any individual issue and purchases are limited to euro-denominated bonds, excluding financials.
It would therefore struggle to find enough paper in the relatively small green bond universe.
Increase in global insurers shunning coal industry over climate change The number of
insurers refusing to
underwrite coal plants has more than doubled in the past year as concerns about the causes of climate change grow.
More than a third of the world’s major insurers have divested from coal, campaign group Unfriend Coal claims. At the end of 2019, 35 insurers had commit- ted to the move with a further 10 placing additional restrictions on providing cover for the coal industry, which is seen as a major contributor to climate change. While nearly half of the global reinsurance market now has a clear exit plan for coal investments, less than 10% of primary mar- ket insurers have followed suit. The growing reluctance to insure coal firms has pushed premiums higher. Liability insurance costs have increased by between 5% and 10% during the past year and auto liability insurance costs between 10% and
20%, according to a Willis Towers Watson report. “AIG and FM Global have also shaken up the markets,
with both choosing to
non-renew or significantly reduce capacity on programs that they have been writing 100% of for many years,” the report reads. “This has left a huge void and many miners scrambling to access dwindling capacity.” In addition, Munich Re has withdrawn from all forms of mining risk in South Africa, following three years of underwrit- ing losses. Campaigners hope that their efforts to tar- get insurers could lead to fewer coal plants. One example is the planned construction of the Carmichael Mine in Australia. Having received planning permission from the Australian government, Indian miner Adani is struggling to find an insurer will- ing to underwrite the project. The bid has so far been rejected by 16 firms.
The planned build of the Carmichael Mine has attracted controversy, due to the poten- tial release of 4.5 billion tonnes of carbon dioxide emissions during its lifetime and because of the impact of the construction on the Great Barrier Reef. Jennifer Morgan, executive director of Greenpeace International, urges insurance firms to step up their efforts. “Insurance companies are as culpable for the climate emergency as the fossil fuel industry,” she said. “While they insure lives, health and property, they service a sector that is seem- ingly destroying all three. If they wanted to, insurers could strip fossil fuel firms of their social license and their access to finance for the benefit of people and planet.” Peter Bosshard, co-ordinator of the Unfriend Coal campaign, added: “The role of insurers is to manage society’s risks – it is their duty and in their own interest to help avoid climate breakdown.”
Issue 89 | December-January 2020 | portfolio institutional | 23
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