Green bonds find roots in Singapore
From June 2017, the government of Singapore will introduce a grant scheme for green bonds. The scheme is hoped to incite the use of green bonds as an asset class in the country, following global acceleration and growth of the climate bond market in the last four years. The recent explosion in environmental interest and awareness led to last year’s global green bond market being valued at $112 billion – and it’s set to grow in the foreseeable future.
The history of green bonds dates back to 2007 when the first one was issued. Since then there have been a plentitude of developments, including corporate green bonds, high yield green bonds and municipal and local government green bonds. However different these issuances may be, they carry the same unique goal of funding projects with positive environmental and/or climate benefits. Proceeds from the bonds, backed by the issuer’s entire balance sheet, are earmarked for green projects.
Despite some initial misconceptions, green bonds are now largely perceived as appealing to most investors as their counterpart, so-called brown bonds, due to the similar terms, conditions and tenure of both bonds. Green vs brown is now a hotly debated topic among investors; at one point green bonds were seen as high risk and unchartered, and therefore somewhat avoidable. But not-for-profit organisation the Climate Bond Initiative calculates that green bonds are around 89% investment-grade, and the group spends much of its time promoting the green revolution.
Green bonds: a call to action for environmentally conscious investors
Green bonds are also a good way for investors to turn climate change awareness into large scale action, which they would otherwise be unable to achieve alone. Investment in green bonds is, for many, easier and of bigger impact than taking the stairs instead of the elevator (although every little bit helps, and such actions are important and worthwhile, too).
To qualify for Singapore’s grant scheme, bonds must have a minimum value of S$200 million and a lifespan of at least three years. The bond can be denominated in any currency, but must be issued in Singapore. Once confirmed, recipients of the grant scheme will be able to offset the cost of obtaining an external review for green bonds for qualifying issuances up to either S$100,000 or 100% of the cost – whichever is cheaper – per issuance. However, issuers will be able to apply for and receive the grant multiple times.
First green bond issued in Singapore
City Developments Limited (CDL) kick-started Singapore’s green bond scene by issuing the first as a Singaporean company earlier in April through its subsidiary, CDL Properties. The bond raised S$100,000 at 1.98%, due in 2019.
Proceeds from this specific bond will go towards repaying a $100 million loan from CDL Properties to CDL, which owns the environmentally pioneering Republic Plaza. Through cooling plants and energy efficient lighting, the building saves annually over six million kilowatt-hours of energy and 10,255 cubic meters of water. All this translates to annual cost saves of $1.2 million worth of energy. CDL already issues annual sustainability reports, and in issuing its bond CDL deputy chief exec Sherman Kwek acknowledged the role real estate companies have to play in promoting and realising Singapore’s green initiatives.
CDL’s green bond is the first in what is hoped to be a series of environmental initiative based bonds in the real estate sector that will help the nation of Singapore to achieve its goal of having 80% of its buildings go green by 2030.
However, it’s not just the real estate sector that are expected to issue green bonds in the foreseeable future. Among the myriad of companies that have issued green bonds recently around the globe are Apple, the European Investment Bank, EDF Energy, Toyota and Bank of America. They reportedly used the proceeds of their green bonds to finance projects including increasing the use of biodegradable materials in product manufacturing, running offices 100% on renewable energy, installing solar and wind farms and a host of other environmentally friendly projects.
Other industries are taking note too
Many companies, like Apple, also have some of their own self-interests at heart; investing in green bonds helps to protect things like forests and watersheds, which preserves materials they use in their own product manufacturing. Toyota’s investments have secured their ability to further advancements in electric and hybrid cars – which are popular among the people and, consequently, Toyota’s balance sheets.
The specific Singapore companies and their industries that might take advantage of the green bond scheme are anyone’s guess, but the above examples demonstrate the scope and vision that climate friendly bonds can help to realise. With 17 Singapore-listed firms proudly sitting in the Forbes’ 2,000, including DBS, Singtel, United Overseas Bank and Wilmar, it’s clear that investors will want to keep a close eye on this fledgling asset class.
The explosion of green bonds onto the investing scene has been heralded as a positive and constructive financial resource. They’re expected to be spurred by clients, too, as a recent survey revealed 70% of investors said they were interested in sustainable investments. The funding period for interested parties will take place between June 1st 2017 and May 31st 2020. In those coming years the United Nations will host three Climate Change Conferences – the first in Bonn, Germany, later this year – and the Paris Agreement to tackle global climate change will come into force. As the world toils against climate change, herein lies an opportunity for asset managers in Singapore to make a real difference to our planet in both the near and distant future.