Why a Biden presidency will transform the Global green bond market.
In July, presidential candidate Joe Biden announced plans to spend $2 trillion to progress the use of clean energy in areas including transportation, electricity generation and construction over the next four years. As part of a group of proposals designed to tackle the growing threat of climate change across the US, this was the first such major commitment from a US leader – be that a nominee or, president.
We believe these plans, alongside his pledge to sign the US back up to the Paris Agreement on the first day of his presidency, will have a seismic effect on the green bond market. This act could lead to a broader rebalancing between the US market and its Euro counterpart.
Moreover, we believe it could represent the final step in cementing the global green bond market as a credible alternative to that of traditional global bonds.
The proposed deployment of his $2 trillion investment pledge could very likely in part be funded by Green bonds. We have seen this through the EU Recovery Fund, a €750 billion recovery effort to help the EU tackle the crisis caused by the COVID-19 pandemic, 30% of which is due to be issued via green bonds.
Currently, green bond issuances in Dollar only represent 23% of the green bond market[i] compared to nearly 33% at the end of 2017. With $70 billion in capitalisation, the investment grade (IG) green bonds issued in dollar remain to be a very little part of the US IG credit market[ii]. Whereas the green bonds issued in Euros have grown exponentially to weigh more than $140 billion and represent 5% of the European IG credit[iii] market today.
So why has the US market lagged so far behind its European counterpart?
The first factor is that the US has never been a driving force on climate change issues, giving little credit to the subject but also to its potential economic consequences.
This has contributed to a certain disinterest in green bonds across the Channel, both from issuers and investors. When combined with the additional costs associated with issuing a green bond (due to factors such as the creation of an issuance framework, a project selection committee or the production of additional reporting, for example), it is perhaps unsurprising that we have so far seen so few US names coming to the market.
However, a change has begun to take place.
High profile climate change disasters have become more and more frequent and beyond their human impact, their economic impact can no longer be ignored. According to the latest United Nations report, their number has doubled in the past 20 years and their cost is estimated at $3 trillion. We therefore observe a shift in the discourse of politicians reflecting a collective and global awareness.
Thus, the consideration of extra-financial criteria and environmental issues are emerging beyond the European continent among American investors. At the same time, the need to integrate the risk associated with climate change is therefore leading American companies, and more generally as well as globally to review their strategies and take an interest in the green bond markets in this context.
This surge has recently seen some high-profile US companies take an interest. We suspect it won’t be long until we see more names, offering a chance to not just show their commitment to a greener transition, but also as a way to capture investor interest both at home and further afield.
Amidst this backdrop, the US market is trying to keep pace with issuance of green bonds over the old continent, but is struggling to keep pace, continuing to strengthen the predominance of Euro issues in the universe. However, we believe that a Biden win could turn the tide.
Indeed, the US IG credit market alone is nearly 2.5 times larger than its European counterpart, and therefore represents colossal growth potential.
Yet, an election of Donald Trump would qualify this enthusiasm insofar as very little change would be expected from the latter, who continues to favor investments in fossil fuels. However, this would only delay the inevitable. As natural disasters become more violent and frequent, every business and state must adapt and invest.
We can therefore expect that the growth momentum of the US green bond market will intensify in any case, even if the latter would be further boosted by a Democratic victory.
Johann Plé, Green Bonds strategy manager
I Ice BofAML GREN Index
ii Ice BofAML C0A0 Index
iii Ice BofAML ER00 Index
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