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Nordic investors hold fire on still-nascent green bonds market

While few doubt the enormous potential for the green bonds to win over institutional investors in the next few years, the amount of take up by Nordic pension funds and other investors in the region is still limited.

The market for green bonds — debt securities designed to raise capital earmarked for sustainable business purposes — is surging, as issuance data collated by Nordic corporate bank SEB reveals.

By the end of August, international issuance grew to USD 84.6 billion (EUR 71.1 billion) in the year so far, up 53% from volumes logged in the same period the year before.

In terms of total cumulative green bond issuance, this broke through the USD 300 bn mark, rising to USD 309 bn at the end of last month, with the total number of individual green bond issuers having risen to almost 500.

The main factor behind the growth is the increasing level of demand for green infrastructure investment and the fact there is now more appetite for the securities from institutional investors, SEB said.

“Over the summer, the future of mobility – and its electrification – proved to be a particularly dramatic case study in how these drivers and factors can come together,” it said.

In May, Volvofinans Bank issued its first green bond, in the second green bond issued in Europe that was intrinsically linked to the passenger car sector.

The SEK 700 million (EUR 73.7 million) 5-year bond issue — made up of a portfolio of loan-and-lease contracts for cars fueled entirely or partly by fossil-free fuels — was oversubscribed, the bank said.

Investors in the issue included Handelsbanken Fonder, SEB IM, SPP Storebrand, Öhman, Carnegie Fonder, If Skadeförsäkring AB and Linköping Council. In total there were 16 buyers of the bond, including just one foreign investor.

Still very small proportion

Christopher Kaminker, head of research, climate & sustainable financial solutions at SEB Bank, told AM Watch that although the market for green bonds is growing very fast right now, the sector is still only a tiny proportion of the the world’s giant fixed-income investment market.

“Since the beginning of the year, the green bond market has exceeded USD 100 billion of issuance on a cumulative rolling last 12 month basis, peaking at USD 129 billion in June. While that number may seem large to some especially in the impact finance world, it is very small when compared to the ocean of fixed income markets,” he said.

Large Nordic institutions make hundreds of billions of euros of fixed-income investments and green bonds are still only a small proportion of that overall, he says.

But looking ahead, Kaminker says demand for green bonds is set to continue to increase at a great pace.

“Beneficiaries will demand it, not least because it has been shown that millennials have a higher sustainability requirement in their investment preferences.

“They want a risk-adjusted return plus an environmental benefit — a double bottom line,” he says.

Sweden’s AP funds, the national pension buffer funds, have been notable investors in green bonds particularly over the last year.

In August, AP3 reported that its green bond holdings had increased steadily at totalled almost SEK 11 billion at the end of June, compared to the fund’s total assets of SEK 338 bn.

AP4 said it was continuing to take part in green bond issues, and was also active in the secondary market for the instruments, which is said was important for promoting the growth of a sound and competitive market.

Norway’s largest municipal pensions provider KLP also invests in green bonds, holding them as part of fixed income allocation, and Norwegian Hydropower bonds have formed part of its portfolio for decades.

Asset class must prove its existence

Casper Hammerich, principal at consultancy Kirstein, cautions that the green bond market has some way to go before institutional investors consider it mature enough for broader investment.

“Green bonds are growing in popularity and there seems to be an interest in learning more about what the asset class has to offer,” he says.

“Many investors thus far feels it is still too early days to invest, and that the asset class has to prove its existence,” he says.

But several Swedish and Norwegian investors have been quite active in green bonds, Hammerich notes and says he believes that the ESG aspect will be appealing to many going forward.

If the demand for green bonds does start to rise, then asset managers will definitely look at this opportunity, he predicts.

“It will then be up for the investors to separate the real specialists from the managers just following the hype,” says Hammerich.

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