“Growing a Green Bond Market in Mexico: Issuers and Investor Summit” was held Oct. 27 in Mexico City, organized by the International Finance Corporation (IFC), the Asociación de Bancos de México, HSBC, and Crédit Agricole. The timing could not have been better. Although the first green bonds were issued in the last decade, their popularity has exploded in recent years. According to estimates, the market will be a $40 billion one this year, a figure that represents a fourfold increase relative to last year.
A green bond is a financial market debt instrument. Its uniqueness lies in the commitment of the issuer to channel the funds raised exclusively toward green projects, that is, projects that have a positive impact on climate change and involve both renewable energy and energy efficiency.
There are three types of green bonds: The first are corporate bonds, such as the recent £250 million issue by Unilever to finance the execution of several internal investments related to efficient manufacturing and clean products. The second are asset-backed securities, one example being the $750 million issue by Toyota, backed by consumer loans, to finance the purchase of electric and hybrid cars. The third are project bonds, such as the $1 billion issue by MidAmerican Solar to finance a solar farm in California.
Green bonds are often confused with carbon bonds, which are increasingly falling out of favor. The distinction is clear. A green bond is a financial debt instrument, while a carbon bond is a certificate that records carbon footprint reductions. The term carbon bond, a misnomer, is really a credit certifying a reduction in greenhouse gas emissions.
The growth in the green bond market has been organic. There is no official regulatory authority that accredits a bond as being green. Initially, participation was limited to development banks and government entities that enjoy a certain amount of credibility and trust with respect to the use of funds. In January 2014, the Green Bond Principles were published. This document sets out a series of principles identified by the World Bank for green bond management. Obtaining a second opinion on the validity of the inclusion criteria as well as an investor reporting system developed by the issuing company is part of this process. Investors, of course, attach great importance to the credibility of the issuer.
What makes a green bond attractive? According to Daniel Farchy, an IFC industry specialist, the advantage is not linked to rates but rather to reputation and branding. A green bond offers an opportunity to send a strong signal that the issuing company is thinking strategically and is focused on the long term. This approach allows for the inclusion of non-traditional investors and the attraction of more select players. In a recent issue by EDF, the French power company, more than 60% of the bonds were bought by socially responsible investors. In Mexico, there have been no green bonds to date that carry this label, although in 2012, Acciona, the Spanish power company, financed a wind energy portfolio in Oaxaca through a project bond, which meets all the requirements to qualify as a green bond.
This post first appeared in Spanish on Diario 24 Horas.
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