In the Green?

After considering the negative impact that debt can have on firms such as Northern Rock and Evergrande, an investor may be wary of investing in this asset class or indeed in a firm that is using debt. In fact, debt used sensibly is beneficial for a firm and ultimately investors.

The main benefit from using debt is that interest payments are tax deductible, this means it lowers the amount of income that is taxed. Problems arise when firms take on too much debt, trying to take advantage of this “tax shield” without considering the possibility that they will be unable to meet their obligations.

Debt, compared to equity, is generally seen to be less risky and serves to provide a cushion during market downturns. We saw this during 2020, as equity markets declined, bond markets rose. It’s important to remember that although equity tends to steal the show, in fact, the total value of the global bond market ($123.5tr) is far higher than that of the global equity market ($105.8tr)[1].

As for the type of bonds, the market can be broadly split into corporate and government issuers and further segmented by many other attributes, including credit quality, inflation protection and maturity, to name but a few.

Over the last few years, investors’ concerns relating to Environmental, Social and Governance (ESG) factors have increased. In response to this, some firms and governments have issued “green” bonds. Essentially, these bonds are issued to finance projects that have a positive environmental benefit. Green bonds are a relatively new development in the bond market, with the first being launched in 2007 by the European Instrument Bank (EIB). Since then, the green bond market has seen exponential growth. Although this is impressive, green bonds still only make up a small fraction of the value of the total global bond market. However, recent events would suggest that green bonds will continue to increase in importance.

In September 2021, the UK government issued its first green bond, or “green gilt”. The UK is somewhat late to the government green bond market, compared to other countries; Poland launched the first government green bond back in 2016! Despite this, investors scrambled to purchase the new 12-year bond, with over £100bn of bids placed, this made it the highest ever for a UK government bond sale, which ordinarily does not attract so much attention. The government raised £10bn in total, which set a record as the largest inaugural green bond issuance by any government to date.[2]

Corporate issuers are also increasingly taking note of the new demand. In Japan, Nippon Telegraph and Telephone, a telecom company recently announced plans to issue $2.7bn[3] of green bonds. This would be the largest single issuance of green bonds by a Japanese company to date. The firm plans to use the proceeds of the sales to help it meet its 2040 target of zero greenhouse gas emissions.

As societal awareness of ESG has increased, so has the demand for investments that take ESG factors into consideration. Governments and corporations have started to react, offering “green” investments, but as with all investments, it’s important to understand exactly what is being offered. So, thorough due diligence is required to ensure the investment really does deliver on expectations. We are looking forward to the opportunity to invest in government bonds that reflect ESG considerations and anticipate such funds will come to market as issuance increases.


References

Climate Bonds Initiative. (2021, October 6). Explaining Green Bonds. Retrieved from Climate Bonds Initiative: https://www.climatebonds.net/market/explaining-green-bonds

Financial Times. (2021, September 21). UK’s debut ‘green gilt’ sale draws blockbuster demand. Retrieved from Financial Times: https://www.ft.com/content/94d604a9-50b9-49f1-b377-a7b6e4083d01

Nikkei. (2021, October 5). Japan’s NTT to issue $2.7bn green bond to fund emission cuts. Retrieved from Nikkei Asia: https://asia.nikkei.com/Business/Telecommunication/Japan-s-NTT-to-issue-2.7bn-green-bond-to-fund-emission-cuts

Securities Industry and Financial Markets Association (SIFMA). (2021). 2021 Capital Markets Fact Book. Retrieved from https://www.sifma.org/wp-content/uploads/2021/07/CM-Fact-Book-2021-SIFMA.pdf

[1] Securities Industry and Financial Markets Association (2021)

[2] Financial Times (2021)

[3] Nikkei Asia (2021)