Hydropower and the Rise of Green Bonds

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Hydropower and the Rise of Green Bonds

Hydropower and the Rise of Green Bonds  looks at the growth and evolution of the green bonds market, and how hydropower fits into the picture

So-called ‘green’ bonds have swiftly moved from a standing start in 2007–08 to being worth in the region of USD 37bn by the end of 2014 and as an asset class appear to be here to stay. As a recent Financial Times article noted, the appetite for these bonds, while still small in comparison to the bond market as a whole, is showing little sign of slowing. 

The article identifies two reasons for this: as a smaller class of bonds, liquidity is lower, meaning that the ability to move out of the bond in times of weakness is limited, and secondly, most buyers are long term investors (no doubt aided by pressure on some of these bigger, longer term funds to move out of sectors such as tobacco, oil and coal) means that they are generally willing to accept a longer investment period and ride out volatility. 

Hydropower bonds are part of the green bonds emerging success story. (However, there appear to be one or two signs that hydro (at least of the type that is needed as we move into a climate changed world) faces the real possibility of being excluded from allowed categories, particularly as the market firms up guidelines and regulations around the definition of what qualifies as a ‘climate change’ or green bond. The green bond concept Bonds are, at their most basic, fixed-income loans with a defined period after which the initial capital is generally repaid, and represent an important tool for (local and national) governments and companies to raise large capital amounts for significant projects or investments. Green or climate change varieties are simply an adaptation of the concept that focus on climate mitigation and adaptation projects or investments and other environment-friendly projects, such as renewable energy or energy efficiency programmes.

Climate bonds, as with other classes, will come in a variety of formats ranging from, for example , corporate bonds (issued on the perceived credit-worthiness of the company issuing the bond) and portfolio bonds (issued through special purpose vehicles to finance a group of green assets or equity investments in these assets), to project development bonds, issued for the purpose of developing an identified asset. The range of climate bonds theoretically covers investments in identified types or sets of projects (or companies holding such projects) through to project-specific bond issues around, for example, an identified large hydropower project. Market development The class was initially developed by the multinational development banks. The first was issued by the European Investment Bank in 2007 (they called it a ‘climate awareness’ bond) , followed by the World Bank with a series of ‘green bonds’ in 2008. The fixed-rate return, triple-A credit rating and positive environmental returns provided

Shoots and leaves by these first offers proved highly popular. The World Bank, for example, to 2014 raised USD 6.4Bn through 67 transactions in 17 different currencies. Until 2013, development banks effectively had the market to themselves. In 2013, however, corporates caught on and began to issue their own green bonds with new investors taking notice.

The market more than trebled between 2012 and 2013, and then trebled again in 2014. While central banks have long been the principal purchasers of development bank bonds, this is not the case for green bonds. For example, 70% of the issue of an African Development Bank green bond in October 2013 was taken up by asset managers, insurers and pension funds, indicating a mainstreaming of the class, and so positive signs for future uptake. Issuers have broadened out too. One of the first issues by a large corporate was by EDF in November 2013 for EUR 1.4bn (USD 1.9nn) to support their wholly-owned subsidiary EDF Energies Nouvelles, which focuses on wind and solar generation but also, to some extent, on small hydro and experimental work on tidal stream development.

This was followed by GDF Suez’s issue of a EUR 2.5bn (USD 3.45bn) green bond in May 2014 , one of the largest to date. The focus of this bond was wider – renewable energy projects such as wind farms and hydroelectric plants (although see below in this regard), plus energy efficiency projects. Iberdrola has also issued, stating that the proceeds would be used for energy produced from renewable non-fossil sources in the form of hydro, geothermal, wind, solar, or other renewable energy, along with transmission, distribution and smart grid projects. Completely private sector corporate issuers have included Unilever, but also more specialist renewable energy providers such as California’s Alta Wind Holdings and Topaz Solar Farms. The very rapid growth in this market has been driven by increasing concern about climate change among investors. This has been driven by the work of organisations such as the Carbon Disclosure Project, which encourages companies to disclose their carbon emissions – surveying 500 companies in 2003 (totalling USD 4tn in assets under management), rising to 5,000 in 2013 (USD87tn). 

Source: Hydropower.org

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