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Green Bonds

In the field of sustainable investment, there is currently an interesting trend in fixed-interest securities. Investors not only want to know in whom they are investing their money, but they want to know in detail what is happening with their money. It can be deduced from this that there is both a lack of trust vis-à-vis the issuers, and an awareness of and a keen interest in what exactly should happen with the invested money. The reason that this is especially interesting is that many banks – especially big ones – have no longer refinanced themselves through deposits.
As was described in the last edition of ECO123, so far it is rather the smaller and medium-sized banks that have disclosed what is financed with their deposits. Now this topic is also reaching the big banks. In 2013, a volume of Green Bonds worth almost 12 billion US dollars was issued, while in 2007 it was just around one billion. There are also instances of companies paying attention to this topic as the foundation of their corporate financing. At present, there is no standardised definition, and so the designation green bond does not have to mean that social and/or ecological investments, projects and businesses are financed in this way; but in January of this year, 25 credit institutes (Merill Lynch, the World Bank, Bank of America etc.) reached agreement on the “Green Bond Principles”.
The main signatories are banks that are not necessarily associated with a sustainable business policy. And so one cannot automatically see them as acting out of conviction. But these institutes have apparently also discovered that there is concrete interest here on the part of the capital markets. As far as liability is concerned, this can apply only to the loan portfolio in question, or to the issuer as a whole. Even though a certain healthy scepticism appears to be in order, green bonds should be viewed more positively than other bank bonds whose rules are not transparent, or only to a very limited extent. Moreover, it shouldn’t be assumed that that the issuance volume is necessarily invested in new projects: in most cases, it is used for debt rescheduling and loan extensions. But, this pooling of existing credit does not have to be negative, as the other possibility would be a kind of blind pool, where you are never exactly sure what is being invested in.
In addition, it must be made clear that there are currently no controls that guarantee that the defined guidelines are adhered to. In order to prevent green washing, it would seem prudent to draw up a track record of individual issuers. Here, you can find two positive examples, the Kreditanstalt für Wiederaufbau (KfW) and the European Investment Bank (EIB):

KfW Green Bond (EUR) – WKN A1X3E7 – Maturity 22.07.2019 – Coupon 0.375% p.a. (Yield 0.39% p.a)

The bond’s total volume is 1.5 bilion euros – the issue proceeds will be used for financing environmental and climate protection projects. The positive effects on the environment will be certified by the independent Centre for Solar Energy and Hydrogen Research Baden-Württemberg (ZSW). Further review and evaluation of the KfW’s Green Bond concept is carried out by the independent research centre CICERO.

EIB GreenBond (EUR) – WKN A1HHM5 – Maturity 15.11.2019 – Coupon 1.375% p.a. (Yield 0.48% p.a.)

The EIB issued green bonds as early as 2007. By the end of 2013, it had refinanced 55 projects in 19 countries of the EU in this way. Another positive point is that the investors’ money is transferred into a separate portfolio. This reduces the risk of the money of Green Bond investors going into other EIB projects that they would possibly not want to support. In 2013 alone, the EIB refinanced 24 projects in the renewable energy field, with total issue proceeds of 1.3 billion euros. The high degree of transparency is a key feature of the Green Bonds: since 2007, all the projects that have been financed have been publicly accessible and transparent. However, what exactly will be financed by the next Green Bond is only known shortly before the issuance, or even during it. The projects so far were mainly in the fields of wind energy and solar plants.

About the author

Marcus Pfingsten (37), Married with one daughter, has a degree in business and, since 2008, has been working in asset management for the cooperative GLS Bank,which belongs to the Global Alliance for Banking on Values (www.gabv.org). He brings information about ethically sustainable investments to the ECO123 investment guide: on renewable energy, ecological agriculture, healthy living etc. and green shares and fund companies.

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