03 Feb 2020
03 Feb 2020
We’ve been talking about green bonds a lot lately. The topic is close to our heart, and we feel it’s our duty to remind investors just how powerful their role is in supporting the low-carbon transition.
The biggest opportunity to make a difference is found in the trillions invested in debt markets. Considering an investment in green bonds is one of the most direct ways to help “shift the trillions” into purely pro-climate projects.
We’re pleased to see the market has grown healthily over the years, spurred by increasingly standardised issuance frameworks, more diversification acrosss issuer types, and a growing appetite from ethical investors. Since March 2014, the investable universe as defined by index provider Solactive has ballooned from 33 green bonds worth $19bn to around 700 bonds worth over $470bn1.
So what entities issue green bonds? In its early days, the market was dominated by bonds issued by development banks and supranational entities, but since then we’ve progressively seen more issuances from sovereigns and financial corporates.
Here we take a look at five different issuers, all of which have a place in our Lyxor Green Bond (DR) UCITS ETF as at January 2020.
The Société du Grand Paris is wholly owned by the French State. Its primary purpose is to “design and develop the overall plan for the set of infrastructure projects that make up the Grand Paris Express and oversee the construction of the lines, fixed structures and facilities, the construction and development of stations and interchanges as well as the procurement of the railway vehicles that will run on the network”. In short, it is responsible for the developing the next generation of transport infrastructure in and around Paris.
With 200km of new automated metro lines (effectively doubling the existing metro network) around the French capital as well as 68 additional stations along the network, the Grand Paris Express is the largest urban project in Europe.
This project is also directly linked to UN Sustainable Development Goal (SDG) #11 – “Sustainable Cities and Communities”. Socioeconomic and environmental studies estimate the project will lead to an annual reduction in traffic of 2 billion vehicles per kilometre travelled, once the entire network is up and running.
Image source: Societe du Grand Paris website, https://media-mediatheque.societedugrandparis.fr/medias/domain1/media623/94153-vbawky8jj1.pdf
In keeping with the green theme, the Société du Grand Paris has developed a specific method and tool to quantify the carbon impact of ongoing and upcoming projects related to the Grand Paris Express programme. The goal is simple: to minimise greenhouse gas emissions. Between 2030 and 2070, when the infrastructure will be fully operational, the project will help avoid emissions of about 754,465 tonnes of CO2 eq per year according to scenario A (lower case), and 1,225,801 tonnes of CO2 eq per year according to scenario B (higher case).2
The EIB issued the world’s first ever green bond in 2007, and remains one of the largest green bond issuers to date. It marked the anniversary of that issue with another in 2017. With a maturity date of November 2047, it is one of the longest-dated green bonds available in the market. Final order books exceeded €1.2bn with 48 investors participating in the issue.
Since its first green bond issuance, more than €19bn has been issued by the EIB, and the proceeds have helped finance 160 renewable energy and energy efficiency projects all over the world (UN SDGs #7 and #11).3
Orsted is an interesting example of a business that has actively engaged in the low-carbon transition. A decade ago, this Danish energy company started its transformation from a black (coal, oil, and gas-based) energy business to a green one. In those ten years, Orsted has reduced its coal consumption by 73%, and decided to fully phase out coal by 2023. It also divested its upstream oil and gas business in 2017, thereby completing its green energy transformation.
Through its issuance of green bonds, Orsted has financed the development of its wind capacity, pursuing an objective to expand its offshore wind capacity to 7.45GW. This project is directly related to UN SDG #7 – ”Ensure access to affordable, reliable, sustainable and modern energy for all” – enabling a transition towards more renewable energy.
Image source: Orsted Green Bonds Investor Letter 2018
In terms of impact, annual avoided emissions attributable to the bond amount to 590,000 tonnes of CO2 per year. For every 1m Danish kroner (€134k) invested, annual avoided emissions attributable to allocated bond proceeds equate to 108 tonnes of CO2.4
Bank of America has shown an ongoing commitment to sustainable finance. Its latest $2bn green bond issuance in October 2019 was its fifth, with proceeds supporting projects relating to affordable clean energy (SDG goal #7).
According to Bank of America, they are the first US financial institution to issue five corporate green bonds, and have raised a total of $6.35bn for clean energy projects since 2013. Examples of sustainable projects funded by their green bond proceeds include wind farms, solar facilities, and energy-efficient LED street lighting programmes5
You might be surprised to see a business historically associated with oil and coal appearing on this list. Yet French energy and utilities company ENGIE has made bold efforts to reorient its business model towards renewables and energy transition services. ENGIE announced in 2016 its plans to exit coal activities, and in 2019 the group CEO laid out its three-year plan, committing to the creation of an additional 9GW of renewable capabilities, and the ambition to become the world leader in zero-carbon transmission.6
ENGIE issued a €1.5bn green bond in June 2019, with proceeds exclusively earmarked for green projects in renewables and energy services. This brought total green bond issuance by ENGIE to €8.75bn, making it one of the largest corporate green bond issuers in the world.7
Fossil-fuel companies have a powerful role to play in helping accelerate the low-carbon transition. Yet we appreciate that some investors’ ESG principles and priorities may not allow for such holdings in their portfolios, which is why you wouldn’t find companies like Orsted or ENGIE in our ESG-screened Green Bond ETF. This variant of our original fund comes with an issuer-level ESG filter designed to exclude companies involved in fossil fuel and nuclear power, controversial businesses or which operate in violation of the UN Global Compact.
If the climate emergency is an issue as close to your heart as it is ours, consider our innovative green bond ETF range to make a tangible, targeted impact.
Our fund launched in 2017 was the first of its kind in the world. Since then, it’s been awarded the prestigious Greenfin label, a national certification for private investments in a green economy introduced by the French government following the COP21. The label solidifies its credibility as a fund committed to financing the green economy, as it demonstrates a high level of requirement for the ‘green’ quality of its underlying assets.
This article is for informative purposes only, and should not be taken as investment advice. Lyxor ETF does not in any way endorse or promote the companies and issuers mentioned in this article. Capital at risk. Please read our Risk Warning below.
1Source: Solactive data as at 07/01/2020. Solactive provides investible green bonds indices subject to the following constraints:
- Green bonds approved by the Climate Bonds Initiative
- Minimum outstanding amount of 100 million USD or equivalent
- Time to maturity of at least six months
- Exclude inflation linked bonds, convertible bonds, US municipal bonds, ABS/MBS and other structured notes
2Source: Société du Grand Paris – 2018 Green Bond Report
3Source: European Investment Bank website, https://www.eib.org/en/investor_relations/press/2017/fi-2017-013-eib-new-nov47-cab-longest-green-bond.htm
4Source: Orsted Green Bonds Investor Letter 2018
5Source: Bank of America website, https://newsroom.bankofamerica.com/press-releases/environment/bank-america-issues-fifth-corporate-green-bond-2-billion
6Source: ENGIE website, https://www.engie.com/en/news/engie-positive-impact-strategy
7Source: ENGIE website, https://www.engie.com/en/journalists/press-releases/green-bonds-now-largest-corporate-green-bond-issuer
This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2014/65/EU. These products comply with the UCITS Directive (2009/65/EC). Société Générale and Lyxor International Asset Management (LIAM) recommend that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on www.lyxoretf.com, and upon request to email@example.com.
Except for the United-Kingdom, where this communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658, this communication is issued by Lyxor International Asset Management (LIAM), a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2014/91/EU) and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority).
The products mentioned are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them. Updated composition of the product’s investment portfolio is available on www.lyxoretf.com. In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed.
Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document is of a commercial nature and not of a regulatory nature. This material is of a commercial nature and not a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.
Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website www.lyxoretf.com/compliance.
Conflicts of interest
This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.