Green Finance’s Colorful Garden Variety
The IIF’s first quarterly tracking of green, social and sustainable debt issuance under accepted definitions predicts another record this year after 2018’s $250 billion, up tenfold the past five years. The total outstanding is now $430 billion, but less than half a percent of the global bond market. 2019 volume should reach $150 billion for bonds alone as banks and investors embrace low-carbon energy transition, and policy makers and practitioners promote viable mainstream market instruments. The US, Canada, UK-Europe and China dominate, and dedicated ETFs that have sprouted got $300 million in inflows the first three months. Only one-tenth of bonds are internationally-tradable and mostly in asset manager hands, even as ESG criteria routinely feature in allocation according to surveys. Supranational institutions were the original sponsors, but banks and non-banks currently hold a 40% share as the main players. China, France and Germany account for the same portion by geography, with China’s $95 billion the biggest and two-thirds bank-driven. Other emerging economies include India and Mexico at $5 billion each, and 95% of the universe is investment-grade at average 6.5 year maturity. By currency the leading portion is euro (45%), followed by renimbi (25%) and dollar (15%).
Separately securities regulators through IOSCO, and other bodies such as the Financial Stability Board and European Commission, are working on a company disclosure template for financial and material information. The IIF points out that climate change consequences are cross-border and regulatory fragmentation is a risk unless industrial and developing country supervisors agree on common terminology and guidelines. In China the central bank has its own procedures, while other major emerging markets like Brazil and South Africa enshrine them in standard listing and corporate governance norms. Insurance officials in the IAIS have a proprietary code which can further misalign industry treatment and data and methodology limitations cited by the UN’s environment program must be acknowledged. The organization in view of these discrepancies urges voluntary efforts in an initial phase before considering mandatory practice, under a broader concept than individual company threat. Technical and commercially-sensitive items should be excluded, and a unified “taxonomy” adopted for reporting and investment purposes, the analysis suggests.
South Africa’s energy crunch is a core issue in May elections with state electricity company Eskom’s precarious financial and operational state. Business and consumer rationing could keep GDP growth at 1%, with fixed capital formation in a slump. Voter surveys show the ruling ANC with the same 55% percent support as two years ago before President Ramaphosa assumed the post. He may shake up the cabinet in a symbolic move, and try to mitigate the cost of recently-granted Eskom rate hikes with the budget deficit already at 4.5% of GDP. Moody’s postponed possible ratings cut until the second half, and with 5% inflation in the target zone, the central bank may ease should the power shortage further bite. In Saudi Arabia Aramco’s petrochemical firm acquisition in a landmark oversubscribed global bond was designed partly to prepare for a clean energy future, but lower OPEC production and geopolitical shutoff also raised oil prices to the $70 plus range to aid fiscal deficit sustainability.
