In January, JPMorgan Chase announced the launch of the Green Bond Principles (GBP), which are designed to provide guidance to issuers and encourage transparency and disclosure for investors in the rapidly developing market for Green Bonds, a fixed income investment product that directs capital to projects with environmental benefits.
The Principles were developed by JPMorgan Chase in collaboration with Bank of America, Merrill Lynch, Citi and Crédit Agricole Corporate and Investment Bank, ultimately garnering the support of thirteen financial institutions. With this support the Green Bond Principles are expected to increase the amount of capital targeted to address pressing environmental challenges by providing transparency to investors.
“Increasing the amount of capital targeted to address pressing environmental challenges such as climate change is critical," said Marilyn Ceci, Managing Director in the Corporate & Investment Bank at JPMorgan Chase. "JPMorgan Chase is pleased to have co-authored the Green Bond Principles. By providing transparency and integrity to the Green Bond market and bolstering investor confidence, we expect the Green Bond Principles will expand capital allocation to critical projects that provide environmental benefits."
The Principles focus on four key areas — use of proceeds, project evaluation and selection, management of proceeds, and reporting. “Under the GBP, each issuer is responsible for defining the investment criteria included in their Green Bonds,” said Ceci. “Then it’s up to the market to determine how green an issuer’s Green Bond is. The Green Bond Principles outline a development and disclosure process that aids investors by encouraging the provision of information that can be used in their evaluation of a Bond, specifically the project categories included by issuers.”
Over the course of 2014, it is anticipated that an independent party will be engaged to help support the process of further refining the GBP through consultation with a wide range of market participants and stakeholders, with a view towards issuing an updated version of the Green Bond Principles in 2015 to further guide and inform investors.
Despite the absence of a standard that defines project categories for Green Bonds, the market is thriving. Since the first Green Bond was issued in 2007 by the European Investment Bank (EIB), over $21 billion (USD equivalent) in Green Bonds have been issued, and $10 billion worth of Green Bonds have been issued in 2013 alone. Recent forecasts call for an additional $15 billion worth of issuances in 2014.
“A big part of the allure of Green Bonds is that they give investors the opportunity to invest in a climate-friendly agenda without taking the exposure of individual projects,” said Ceci. “The bonds are pari passu to the senior unsecured debt of the issuer, so repayment of the bond is only subject to the issuer’s credit risk.”
JPMorgan Chase is currently the top 2 underwriter of Green Bonds by number of transaction as well as total notional issued. To date, JPMorgan Chase has underwritten a total of $5.25 billion of Green Bonds across 24 transactions, capturing 11.2% of the market since November, 2007 and participating in $4.1 billion of issuances in 2013 alone.
To date, the most common issuers have been supranational organizations such as the European Investment Bank (EIB), the International Bank for Reconstruction and Development (IRBD) and the International Finance Corporation (IFC). However, in 2013 the Commonwealth of Massachusetts issued the first municipal Green Bond, and the largest Green Bonds to date were issued by a corporate, Électricité de France (EDF), which printed a €1.4 billion transaction, and EIB, which continues to tap their benchmark Green Bond which today is € 1.5 billion outstanding. Ceci sees this trend continuing.
With these new fixed income instruments, interest from asset managers offering Green Bond funds is expected to increase: “With the publication of the GBP, JPMorgan Chase expects to see corporate issuers and municipalities lead the growth globally, as well as a continuation of issuance from supranationals and foreign agencies,” said Ceci.
Read more about the Green Bond Principles.