The green bond market is reportedly set for another stellar year, at least on a global scale with volumes up 14% for H1 2024, compared with the same period last year. Data from the Climate Bonds Initiative shows that H1 2024 aligned green volume reached $385.1 billion, up 14% compared to H1 2023, and by the end of June, cumulative aligned green bond volume had reached $3.2 trillion[i]. The researchers claim that by the end of June 2024, Climate Bonds (green, social, sustainability, and sustainability-linked bonds- collectively termed GSS+) had recorded a cumulative volume of $5.1 trillion[ii], meaning green bonds represent more than 60% of GSS+ volumes.
The term ‘green bond’ refers to a product which is not dissimilar to traditional bonds. They work in much the same way, except for one key difference: the money raised from investors in green bonds is used exclusively to finance projects that have a positive environmental impact- such as renewable energy and green buildings. The concept of green bonds has been with us since the start of the century; in 2007 we witnessed the issuance of the world’s first green bond by the European Investment Bank (the EU’s lending arm). Since then, many governments and businesses have entered the market to finance green projects.
The data precedes recent news in the UK green bonds market, with a notable offering from Spanish Energy company Iberdrola. Last week the business issued £500 million in green bonds making this its largest offering in sterling in 15 years. The announcement of the 12-year green debt product also marked Iberdrola’s first sterling bond issuance since 2019, as well as the company’s largest in the UK market since 2009. The funds will be used to support future renewable energy investments in the UK[iii].
Whilst the global green bonds market remains buoyant, questions have emerged regarding the creditworthiness of UK corporate green bonds which presently account for 46% of the UK green bonds market (the remaining 54% being ‘sovereign’ or government-owned). The issue stems from Thames Water, the UK’s largest privatised water company which also happens to be the country’s third-biggest corporate issuer of green bonds, behind HSBC and SSE.
Thames Water has been in financial difficulty for some time, and following fears it could run out of cash as soon as the end of this year[iv], credit rating agencies Moody’s and S&P applied multiple credit downgrades. The company has since secured a £3bn loan to tide it over until next October, however damage has already been done.
Kevin Leung at the Institute for Energy Economics and Financial Analysis recently noted that the knock-on effect is that Thames Water’s rating downgrade has also dragged down the overall creditworthiness of the UK corporate green bond portfolio, as shown in Figure 1. As Leung notes, the set of bonds now appears much riskier on average, and this certainly isn’t helpful for the continued development of the UK’s green financing landscape as a whole.
Source: Institute for Energy Economics and Financial Analysis
Thames Water’s woes are in contrast to rival Anglian Water, which Leung notes exhibits better sustainable finance credentials, where it explicitly ties the use of proceeds to its asset management plan and reports project descriptions for each debt instrument.
Source: Institute for Energy Economics and Financial Analysis
The last UK green financing strategy expected that green bonds would help to “catalyse further growth of the corporate green bond market in the UK”. Yet the volume of UK corporate green bond issuance has remained substantially below its peak in 2021. Meanwhile, corporate green bond issuances in Europe have broadly been recovering.
Leung concludes that: “The troubles in the water sector send a warning. The consequences of under-investing in climate mitigation and adaptation will be far-reaching in the years ahead. To prevent these — and in turn the costs of a disorderly transition — concrete policies and strategies require system thinking and swift actions.”[v]
[ii] Ibid
[iii] Iberdrola completes largest green bond issue in sterling - Energy Live News
[iv] Process Update - 07:02:50 20 Sep 2024 - AW14 News article | London Stock Exchange
[v] Ibid
Lauren has extensive experience as an analyst and market researcher in the digital technology and travel sectors. She has a background in researching and forecasting emerging technologies, with a particular passion for the Videogames and eSports industries. She joined the Critical Information Group as Head of Reports and Market Research at GRC World Forums, and leads the content and data research team at the Zero Carbon Academy. “What drew me to the academy is the opportunity to add content and commentary around sustainability across a wealth of industries and sectors.”
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