Spring in the air

CHRISTOPHER FLENSBORG of SEB, a Swedish bank, calls it another tipping-point for “green bonds”, and he should know: he invented them. Green bonds tie the proceeds of an issue to environmental activities. On March 19th Unilever, the world’s second-largest consumer-goods firm, issued a £250m ($415m) bond earmarked for reducing waste, water use and greenhouse-gas emissions. The issue takes green bonds into new areas and could turn them from a niche product into a mainstream financial instrument.

For most of their history such bonds have been the preserve of international financial institutions (IFIs). Because it is hard for investors to know what is green and what isn’t, green projects meant those designated as such by the World Bank’s environment department. Starting in 2008 the bank issued bonds to finance its projects: the first green bonds. The sums were small—tens of millions. Investors were few.

That started to change in 2013. In February last year the World Bank’s private-sector arm, the International Finance Corporation, raised a $1 billion green bond—large enough for money managers to take notice. In November a French energy group, EDF, raised €1.4 billion ($1.9 billion), the first euro-denominated green bond from a large company. This marked the point at which corporate issuers took over from IFIs as the main issuers of such bonds. EDF’s was twice oversubscribed. Toyota is raising $1.75 billion to help finance sales of car loans for hybrid and electric vehicles. That bond was even more heavily oversubscribed. Unilever changes the business again. The bonds of EDF and Toyota were for new, self-evidently green projects: renewable energy and electric vehicles. Unilever’s is to reduce the environmental footprint of its ordinary activities.

Just as issuers have changed, so have investors. At first they were public-sector institutions, such as the California state teachers’ pension fund and Sweden’s AP pension funds. But in November 2013 Zurich, an insurance firm, said it would invest $1 billion in green bonds. It appointed BlackRock, an investment-management giant, to run its portfolio. Other money managers are piling in. In 2012, 95% of investors were owners of assets (mostly pension funds, according to Mr Flensborg). Now more than half are asset managers.

Some teething problems remain but overall the market is soaring. Unilever’s issue brings the value of green bonds recorded so far this year by Dealogic, a market-information firm, to about $6 billion, four times as much as in the same period in 2013. Last year’s total was $11 billion. Jim Kim, the World Bank’s president, thinks it will rise above $50 billion next year. At this rate, SEB’s forecast that green bonds will account for 10-15% of the corporate-bond market by 2020 does not seem optimistic.