Popularity of green bonds presents opportunities for U.S. utilities
The U.S. utilities industry can benefit from the growing popularity of green bonds, a financing vehicle that gives issuers the opportunity to improve the diversity of their pool of investors and possibly lower the cost of capital.
Green bonds, debt securities issued to raise capital for climate-related or environmentally beneficial projects, are still a relatively small part of the overall debt market. But the financial instruments are growing in popularity both with issuers looking to raise funds for eco-friendly projects and with socially responsible investors.
Investors, issuers and banks that underwrite securities spoke about opportunities in the green bond sector at the Edison Electric Institute’s financial conference this week in Phoenix.
Green bonds have become a showcase financial product in many countries around the world, particularly in Europe and Asia.
Global green bond issuance for the first nine months of the year rose to $63.2 billion, an increase of 132 percent from the same period in 2015, according to Moody’s Investors Service. That volume of debt easily surpassed the previous annual record for green bond issuance of $42.4 billion in 2015.
Moody’s forecasts that if the issuance pace continues, the global market could hit $80 billion to as much as $100 billion of green bond volume for 2016.
Southern Company is one utility that has successfully tapped the green bond market in recent months.
“When you think about accessing the green bond market, we think it’s a natural evolution, a way to possibly lower the cost, or conversely to help diversify the pool of capital,” said Art Beattie, executive vice president and chief financial officer at Southern Company.
In June, Southern Company subsidiary Southern Power issued euro bond-denominated green bonds with a U.S. dollar equivalent of about $1.2 billion. The bonds were well received by investors and helped the company invest in solar and wind power generation projects.
“We believe that we may have gotten a 5 basis point advantage over what we could have issued those bonds for in the traditional markets,” Beattie said.
Last year in a $1 billion deal in the U.S. market, Southern Power was the first investment-grade U.S. electric utility to sell green bonds to help pay for investments in sustainable generation.
“As we focus on the cost of capital for our business and lowering the costs for our customers, it provides us with a clear advantage,” Beattie said. With demand outpacing limited supply, issuers have more “pricing leverage” when it comes to issuing green bonds, Beattie said.
The utilities industry has been targeted – somewhat unfairly some investors say –for its contribution to excess pollution and global warming. But green bonds can help turn that story around.
“I think that with issuing green bonds or project finance bonds around renewable energy projects, you have the opportunity to change the discussion of what the good is in what the utilities space currently does and what they can do going forward to help mitigate CO2 emissions and mitigate the impact of climate change,” said Stephen Liberatore, managing director and lead portfolio manager of fixed income at TIAA Asset Management.
TIAA has been an investor in green bonds since long before they became popular. In order to mitigate risk, analysts in this sector should examine the individual projects and issuers to determine whether the projects truly support environmental improvements.
“It is important to look at the underlying projects to make sure you understand if there is a direct and measurable environmental benefit and is that something that your investor base is looking to invest in,” Libertore said.
TIAA invests in solar, wind and geothermal projects, energy from waste facilities, securitizations of solar leases and loans, and qualified energy conservation bonds from municipalities. TIAA generally does not invest in nuclear projects.
Hervé Duteil, managing director and regional coordinator for Corporate Social Responsibility & Sustainable Finance in North America at BNP Paribas, said investor diversification is a major benefit that issuers get from issuing green bonds.
Investor diversification improves the liquidity of an issuer’s outstanding debt, which supports prices.
“The reality is that green bonds do convey something about your credit, which may justify that some investors may act on an issue and be willing to pay up because green bonds are showing your company is tackling environmental issues strategically,” Duteil added.
