Green bonds as share of bank borrowings to rise on China, securitization
Green securitization is expected to boost green bonds as a share of bank borrowings, says S&P Global Ratings.
Green securitization – the bundling of small-scale green loans into securities – is expected to boost green bonds as a share of bank borrowings, says S&P Global Ratings.
Regulations that promote green bonds such as China’s publication of its green bond guidelines and EU’s Energy efficient Mortgages Action Plan are expected to provide further impetus to market growth, it adds.
For now, green bond issuance represents a measly 0.5% of banks’ total current borrowings. The issuance of some 200 banks reviewed by S&P accounts for just 1% of the total green bond market. By comparison, green bond issuance by corporates was 2% of the total bond issuance in 2017.
While banks’ issuance is growing, it is significantly below the OECD’s estimates of yearly green investment exceeding US$4.3 trillion. The amount of green bonds that banks are issuing are too small compared to estimates, S&P says. Green investment in more established bond markets including EU, the US, China and Japan is about US$2.2 trillion a year, a third of which is financed through loans.
For many banks, green bonds have not become a regular channel for raising capital, with 65% of global banks having issued one so far, says S&P.
The rating agency suggests that “peer and investor pressure could drive banks to ramp up efforts in the green bond market.” Currently, more than half of banks that issued green bonds are not in the top 200. In fact, the large majority of the top 200 banks haven’t issued any green bonds yet.
With green securitization, additional capital can be unlocked to fund low-carbon initiatives. Green bond experts say the market may include loans for small-scale low carbon projects, such as energy efficiency upgrades, rooftop solar PV and electric vehicle leases, which can be aggregated and securitized into larger pools to access institutional investor capital.
The process allows lenders an opportunity to refinance existing loan portfolios and recycle capital to create a fresh portfolio of green loans.
China dominates green bond issuance by banks. Chinese banks represent more than 50% of total green bond issuance by banks and around 40% of the number of green bond issuing banks, says S&P.
On the back of policies supporting a green financial system in the country, China could continue to lead in banks’ issuance of green bonds going forward.
Outside China, Europe is the most active region, representing a quarter of total issuance and the number of bank issuers, S&P says.