Going green in the bond market

Keely Lockhart speaks to Julia Hoggett, Managing Director in Debt Capital Markets at Bank of America Merrill Lynch, about an exciting area of environmental finance

In 2007, Bank of America Merrill Lynch led the first ever green bond issuance for the European Investment Bank. Since then, the bank has become one of the key underwriters at the forefront of this developing market.

The bank is currently pushing for the standardisation of the green bond market in order to boost corporate investment in projects tackling climate change and other big environmental issues affecting the future of the planet.

We chatted to Julia Hoggett, Managing Director in Debt Capital Markets, who's responsible for Bank of America Merrill Lynch's green debt capital markets efforts in EMEA, about the intricacies of this market.

First of all, what is a green bond?

A green bond is much the same as a traditional bond with the key difference that the proceeds raised from the sale of a green bond can only be spent on environmentally beneficial projects.

Why are green bonds appealing to investors?

Following the financial crisis, much of the attention of investors and issuers has been focused on capital preservation and capital building. However, as the global markets have reached a more stable position, issuers and investors have started to look at initiatives that they were focused on prior to the crisis, including the development of environmental finance markets.

Many investment managers are now focused on maximising the quality and the diversity of the investments they make. This is because their clients are increasingly asking for more evidence of the impact of their investments - there's a growing focus on socially responsible investing.

Investors in green bonds know that their money is going to be used for a socially responsible end. What's more, green bonds are financially appealing. Outcomes of environmental initiatives can be financially uncertain - for example, in an area such as renewable energy projects new technologies are often being developed that may not have a long and established financial track record - but with green bonds investors' credit risk is on the institution issuing the green bond, not on the green project itself. This enables investors to rely on the experience of dedicated institutions that invest in a broad range of environmentally appropriate projects, and have general credit recourse to their overall business model.

Green bonds are also great news for the development of green technology, because they provide a new avenue of funding for an area that has traditionally struggled to secure long-term investment. The more investment crowds into the environmental sector, the bigger and better the developments become, increasing the likelihood of more investment.

What role does Bank of America Merrill Lynch play in the green bond market?

Our role at Bank of America Merrill Lynch is to act as the underwriter for green bonds. That means my team and I work with the general debt capital markets teams to identify opportunities to issue green bonds and then work through the process of green bond issuance with prospective issuer clients. Hopefully, over time, green bonds will become more economic for issuers than their less environmentally friendly alternatives, increasing the flow of funding into the space.

Working in green debt capital markets is exciting as the market is just beginning to show potential and is therefore constantly evolving. It's not an area simply reserved for highly-experienced bankers either - analysts and associates are heavily involved in our green bonds work.

In my view, this is important because the more analysts and associates who are exposed to this product early on in their careers, the more likely it is to become a standard part of the suite of debt capital markets products they offer to their clients.

How committed is the bank to environmental finance?

Bank of America Merrill Lynch has a long-standing commitment to environmental finance. We've already surpassed our original $20 billion (£12.3 billion) goal of investing in business activities that address climate change and are now aiming to invest an additional $50 billion over the next ten years.

We've been a leader in the green bond market since 2007, when Bank of America Merrill Lynch lead-managed the first green bond from the European Investment Bank. We're also one of the only institutions to have dedicated personnel for green debt capital markets on both sides of the Atlantic.

What's next for the green bond market?

The green bond market has done more in 2013 than in the previous five years put together, both in terms of its supply of securities and the attention it's received. However the best way to get the most out of the green bond market would be to complete the build-out of a green bond standard in order to further encourage financing into this space.

Bank of America Merrill Lynch has been working with other leading investment banks on the Green Bond Principles that aim to clarify what process an issuer should follow when bringing a green bond to market. They establish four recommended criteria that a green bond issuer should fulfill. They also help to ensure that the concept of a green bond is commonly understood and respected as a mechanism to encourage investment into this space.

The Green Bond Principles are very much a collaborative effort between investment banks, issuers, and investors to develop an optimal market for green bonds. They'll make sure that the scale of the growth we've seen in 2013 is maintained, and that by 2018 at the latest, green bonds will be a standard part of the way the markets operate.

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