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Wall Street fuelling appetite for clean energy bonds

Big U.S. banks are issuing green bonds to back wind and solar energy projects, as investors want to be part of progress.

Ron Antonelli/Bloomberg

Bonds backing clean energy and other sustainable initiatives are booming.

Investors are snapping up green bonds at the fastest pace on record, as big banks such as Morgan Stanley and Bank of America Corp. pile in with new issuance to feed the growing appetite for socially responsible investments.

More than $16-billion (U.S.) of green bonds have been sold this year worldwide following issuance of $32.6-billion in 2014, according to data compiled by Bloomberg. Newcomers such as Morgan Stanley are raising the debt to finance solar- and wind-powered projects, fuelling issuance in the U.S. and putting the market on a path to grow by more than 50 per cent by the end of the year, according to Standard & Poor's.

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"What is called clean or alternative energy now is just going to be called energy in the future, and we want to be a part of that," said Matthew Duch, a money manager at Calvert Investments in Bethesda, Md., which oversees more than $13-billion in assets, after purchasing Morgan Stanley's inaugural green bond offering on Wednesday. "The bonds are attractive and you get to be a part of progress."

Green bonds – which have been sold to back restoration of waterways in Chicago and help Toyota Motor Corp. finance vehicles that are powered by hybrid or alternative fuel – are gaining popularity with companies that hope to attract a growing investor base looking to buy securities backing renewable projects. Morgan Stanley will use its debut $500-million green bond to fund the development and construction of wind farms and solar energy generation, according to a regulatory filing.

Bank of America, the second-largest U.S. bank, issued a $600-million greenbond to fund energy-efficiency and renewable-power projects in May, Bloomberg data show. The lender sold its first green-bond with a $500-million offering in 2013. The securities are part of a pledge to commit $50-billion over 10 years for low-carbon projects through funding and banking services.

Despite their growth rate, green bonds are still about one-fifth of 1 per cent of the global bond market.

The debt gained 7.6 per cent in 2014, more than the 5.6-per-cent advance in corporate bonds of similar maturity in the U.S., according to Merrill Lynch indexes. The securities have returned 0.8 per cent this year, compared with a gain of 2.6 per cent for the broader market.

"Some issuers have embraced it, others are slowly jumping on and others haven't gotten there yet," said Caroline Cruickshank, managing director in Bank of New York Mellon's corporate trust group, which acts as a "plumber" for the market, providing everything from third-party monitoring of deals to fiduciary oversight.

The debt still faces several hurdles, namely that there isn't yet a legal definition for what exactly constitutes a green bond, according to Ms. Cruickshank.

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"Further adoption is likely to be driven by utility issuers and the standardization of the criteria," Elchin Mammadov, an analyst at Bloomberg Intelligence, wrote in a report Thursday.

Banks, including Citigroup Inc., Bank of America, JPMorgan Chase & Co. and Credit Agricole SA, which created a common criteria for the debt to act as a catalyst for the development of the market in 2014, updated their standards in March, according to trade group International Capital Market Association.

Complying with the criteria is voluntary and there are no enforcement mechanisms if an issuer doesn't, according to the ICMA.

"Issuers are getting more creative, and as they do the investors will come," said Marshal Salant, global head of alternative energy finance at Citigroup. "The question is when."

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