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Europe Green-Bond Boom May Cool Next Year After Breakneck Growth

(Bloomberg) -- Green bonds were a rare bright spot in Europe’s lackluster primary market this year. Some of that sheen may start fading in 2019.

A combination of market maturity and wider volatility may damp growth in euro green-bond sales after issuance more than tripled in two years, based on data compiled by Bloomberg. Other developments in green financing, such as loans or securitizations, may also take more of the spotlight.

It will be “extremely hard” for green-bond sales to maintain the same pace of growth, said Mike Wilkins, head of sustainable finance at S&P Global Ratings. “I wouldn’t be surprised if it starts to flatten out.”

Europe Green-Bond Boom May Cool Next Year After Breakneck Growth

Any slowdown would hurt Europe’s primary market, as a surge in bank issuance helped euro green-bond sales jump 18 percent this year to 53 billion euros ($60 billion) -- a marked contrast to the 10 percent decline seen in non-green issuance. It adds to the risk facing European bond sales, as the European Central Bank caps stimulus measures and the region prepares for uncertainty surrounding the U.K.’s departure from the EU.

Recent volatility has already prompted some potential green-bond issuers to hold off on sales, according to Farnam Bidgoli, head of sustainable bonds EMEA at HSBC Holdings Plc. Issuance next year may also partly depend on whether turbulence eases off.

“It’s going to be contingent on what the broader market looks like,” Bidgoli said.

Electric Cars

Still, green-bond sales may find new growth drivers potentially including automakers funding development of electric cars, Bidgoli said. Sovereign and sub-sovereign sales could also pick up following French and Polish deals this year. The Netherlands has already outlined plans for a debut green bond in the second quarter, while Cinco Dias reported this week that banks are pitching the idea of a Spanish green note.

Bankers are also confident that green-bond sales will ride out the end of ECB quantitative easing due to growing interest in investments that consider environmental, social and governance factors, or ESG. Assets under management at green funds in Europe has doubled since 2013 to more than 32 billion euros, according to research provider Novethic.

“I don’t think QE will matter that much in terms of issuance of green bonds,” said Arnaud-Guilhem Lamy, a senior portfolio manager at BNP Paribas Asset Management. Europe green-bond sales will still see “double-digit growth,” he said.

Ratings Tools

ESG bonds sales may be supported by EU-led policy developments and by new credit-rating tools providing greater clarity, according to Agustin Martin and Michael Gaynor, analysts at Banco Bilbao Vizcaya Argentaria SA. Banks may also step up sales of green covered bond dues to looming repayments of low-cost ECB funding, known as TLTRO, they wrote in a report.

Other forms of green financing may also expand as banks develop new ways of linking debt to environment standards. Verbund AG, Austria’s biggest utility, signed a 500-million euro five-year loan with borrowing costs tied to sustainability ratings earlier this month. S&P also last month highlighted “large growth potential” for the green CLO market.

Such instruments reflect how the finance industry has accepted the idea of environmental debt and begun to overcome challenges such as assessing an investment’s “greenness”. This growing market familiarity may also encourage more borrowers to tap the rising demand for green investments.

“The world is becoming a bit greener,” said Patrick Wuytens, head of high-grade syndicate at ING Groep NV. The investor base is growing and issuers’ interest has been piqued by rising numbers of “successful green bonds,” he said.

©2018 Bloomberg L.P.