Dutch, Hong Kong issues shine a light on growing green bond market

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Two recent, sizeable green bond launches have underscored the appeal, both to issuers and investors, of this growth market to raise funding for green projects as market participants seek to contribute to environmentally sound (‘green’) projects and to a more sustainable economy in general.


Marking the first green bond issue by a AAA rated sovereign, the Netherlands issued a roughly EUR 6 billion bond, while on the other side of the world, Hong Kong SAR China (rated AA+) launched a USD 1 billion issue under its USD 13 billion (HKD 100 billion) green bond programme.

Both the Dutch and Hong Kong governments signalled there would be multiple green bond issues in the future, which would allow their bonds to swell in size to at least EUR 10 billion for the Dutch offering and USD 12 billion for Hong Kong. These sizes would be second only to the EUR 16.5 billion French “green OAT”. After that bond was launched in 2017, the OAT had made France a driving force in the implementation of the goals of the Paris climate accord.

The latest bonds put the climate bond market well on track for an estimated almost 50% increase over the 2018 total, exemplifying its rapid growth since the introduction of the first green bond in 2007.

Green bond best practice

We believe sovereign green bonds are the perfect financial vehicle for countries to close the gap between the nationally determined contributions, which are at the heart of the Paris accord, and debt capital markets. They represent “the missing link” as they help countries to finance their sustainable and green infrastructure needs and climate strategies as described in the NDCs. Sovereign green bonds will allow investors and stakeholders to track and monitor governments’ fiscal policy commitment in support of the transition to a low-carbon economy.

The Dutch bond[1] sets best practices in terms of credible green finance credentials:  it is the first sovereign bond certified by the Climate Bonds Initiative. At least 70% of the proceeds are aligned with the current EU taxonomy and concern clean energy and sustainable transportation. Furthermore, it prioritises green real money investors over regular investors as the Netherlands is one of the first green bond issuers to award an extra 10% allocation for green investors.

As for the HK issue, the proceeds will be managed by the Capital Works Reserve Fund and will be used to finance or refinance public projects with clear environmental  benefits: 95% of the proceeds are to go towards waste, water and green buildings.[2]

Such clarity on the non-financial features of an issue matters in the green bond market, and in the market for sustainability finance in general, where uncertainty and confusion over what is actually green can still deter investors keen to be part of a growing movement towards taking greater responsibility when it comes to the environmental, social and governance (ESG) aspects of investing.

Moving towards greater transparency

Fortunately, there is progress when it comes to tackling greenwashing amid improving transparency on the use and management of the proceeds, on project evaluation and on reporting on the environmental and social benefits of the projects financed by green bonds.

BNP Paribas Asset Management uses its own two-step process, analysing green bonds at issuance (‘ex ante’) to ensure they comply with an in-house list of eligible sectors and projects. This involves scoring issuers on criteria such as the environmental impact, dealing with social issues and decent governance. Green bonds from companies and other issuers that score low – in the bottom 10% – would be left aside. From experience, we know such issuers often fail their sustainability objectives.

In terms of eligibility, it pays to be critical. As an example, a green bond by an eastern European country to fund replacing diesel trains with electric locomotives appeared laudable. However, the reality was that 85% of the power in the country was generated using coal. This disqualified the project from participation, in line with BNPP AM sector policies.

Once a green bond has been chosen for investment, we scrutinise issuer reports to gauge the actual outcome and impact of the projects (‘ex poste’). Throughout this process, our analysts consult and challenge issuers on the implementation of their green bond programmes, with non-compliance resulting in (portfolio) action.

Reassuring investors that green is actually green

Such a strict procedure should help reassure investors that what they are investing in is actually green. It contributes to bolstering the reliability of ‘green’ (sustainable) financial products. Industry-wide standardisation of the definition of what is ‘green’ looks set for a boost with the impending introduction of an EU taxonomy, alleviating investor scepticism about what lies beneath the ever-swelling stream of products marketed as ‘green’.

With the taxonomy, the EU aims to develop a wide understanding of what is environmentally sustainable. The classification system should encourage research and development of truly green technologies and reward those entrepreneurs that seek to green their business. It should improve disclosure and make measuring capital flows to environmental activities possible. It should foster investments where they are most needed.

To sum up, in addition to potentially boosting portfolio returns, we believe green bonds have environmental and ecological benefits. A further advantage is that green bonds can help meet legal or regulatory obligations such as the ones contained in Article 173 of the French energy transition law (and future EU regulation) by allowing investors to offset CO2 emissions with other products in their portfolios.

Felipe Gordillo and Xuan Sheng Ou Yong

Also read the Investors’ Corner blog post on Green bonds: investments generating environmental and ecological benefits

Also read the Investors’ Corner blog post on The EU taxonomy: the metric system of the 21st century

[1] https://english.dsta.nl/subjects/g/green-bonds

[2] www.hkma.gov.hk/eng/key-information/press-releases/2019/20190522-3.shtml


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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

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Felipe Gordillo

SRI Senior Analyst

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