Green Bonds an Unstoppable Trend

Q: What is driving the demand for green bonds in the private sector at the global and local levels?

A: Green bonds provide a distinct approach to investment. Climate change has forced institutional investors to consider the associated risks when making an investment. These bonds have become a tool to guarantee that proceeds issued by corporate investors or governments are directed into the climate economy, meaning mitigation or adaptation projects.

The main factor driving demand for green bonds is diversification. There is greater risk associated with having oil and gas-based portfolios, so diversification through green assets has become a priority for global investors. According to the Climate Bonds Initiative (CBI), green bonds will be selected first between two bonds with similar yield and risk evaluation because they can provide the same profit with the advantage of helping the environment. We witnessed that trend when Mexican development bank NAFINSA issued the country’s first green bond in the US market in 2015. The bond was five times oversubscribed and garnered a lot of attention from foreign investors, mainly European, which had not considered NAFINSA for investment before.

Q: What requirements make bonds “green”?

A: Every asset related to a green project can be financed through green bonds. The “green” label has been misused in the past as a marketing strategy, diminishing the public’s trust in the actual sustainability of green assets. The main factor to consider is a third-party assessment or a certification ensuring the bond will be directed to green projects such as renewable energy, energy efficiency, clean transportation or sustainable infrastructure. We are working on a certification process backed by a third party for all green bonds issued by companies or banks in the stock market.

Q: CBI’s goal is to issue over US$2 billion in green bonds. How ambitious is this compared with other economies?

A: US$2 billion is not ambitious. It is actually the minimum requirement Mexico should be considering. An independent study by PwC calculated that Mexico needs a US$5 billion annual investment to comply with its clean energy targets. That study does not consider the resources needed for clean transportation or climate change adaptation policies so, in reality, it is a modest sum as well. We believe the market potential is larger, considering the different needs and the 179 investors present in Mexico.

Q: What advantages do green bonds offer in comparison with regular bonds?

A: Renewable energy assets tend to incur higher interest rates than regular assets due to the banks’ lack of understanding of these technologies. Therefore, green bonds will likely be used first for project refinancing. When companies refinance their assets through green bonds, they can get lower interest rates, which is a major advantage for issuers. Green bonds are usually oversubscribed because investors are highly interested in going green and diversifying their portfolios, which effectively translates to a bigger pool of investors. This was the case for NAFINSA. The successful results achieved by NAFINSA’s green bonds made us positive about the launching of Mexico’s green bond market as over 40 percent of the bonds were acquired by Mexican investors even though they were issued in the US. The rest were taken by foreign investors, including a large percentage of European companies. Through these bonds, NAFINSA managed to expand its investor base, which is a desirable outcome for any issuer.

Q: What types of investors do you expect will participate in the country’s green bonds market?

A: The main drivers will be development banks at first, followed by the government. Later, we expect to see mostly institutional investors, like pension funds (AFOREs), insurance companies and some private investment funds. Insurance companies in particular will represent an important pool of investment as they are willing to diversify their portfolios out of brown assets. Corporate green bonds would be the final stage of the green bond market and will take longer to develop but it is an unstoppable trend.