Just days after logistics giant SEGRO ventured into the green bond market for its debut deal comes a warning – this fast-growing market could be a bubble waiting to burst.
The alert came from the Bank for International Settlements – the central banks’ bank – which in its latest quarterly review compared the rapid growth of ESG funds to that of the mortgage-backed securities market before the global financial crisis of 2008.
“Given the very fast growth of the new [ESG-linked securities] asset class, there are questions about the possibility that a bubble might develop unless market transparency can be ensured,” wrote the BIS’s Sirio Aramonte and Anna Zabai. “Could a fundamentally welcome development – helping to finance the transition to a low-carbon world – generate significant financial imbalances?”
They went on: “Historical lessons from the investment volume and price dynamics in rapidly growing asset classes could be relevant for ESG securities. Assets related to fundamental economic and social changes tend to undergo large price corrections after an initial investment boom. Railroad stocks in the mid-1800s, internet stocks during the dotcom bubble and mortgage-backed securities in the great financial crisis.”
Sean Kidney, chief executive of the Climate Bonds Initiative think tank, said of the BIS’s suggestion: “Bubble schmubble.”
Kidney, a long-time advocate of the market, added: “All we have is a massive shifting of capital from what are now clearly patently unsustainable investments to sustainable investments. I’d call that a logical reordering of capital flows and allocations in the face of the policy risks associated with the ‘old’ economy and possibly, but less certainly, physical risks we are facing.
“Certainly we are seeing a premium for green bonds, but it has remained a modest and consistent premium for some years now; not exactly bubble territory, more recognition of the risk differentials between entities signalling, successfully, that they are addressing climate issues and those that aren’t.”
Nonetheless, even the suggestion of an ESG bond bubble could quicken pulses in the boardrooms of corporate real estate. Property companies have been frequent users of the green bond market in recent months, raising fresh debt funding that can be put to work financing or refinancing environmentally friendly projects.
SEGRO’s own issuance showed that investors are clamouring for such deals – the €500m (£427m) bonds attracted an order book of some €4bn, and chief financial officer Soumen Das said the oversubscription highlighted “underlines investors’ recognition of the strength of our business and the importance they rightly place on sustainable investment”.
The REIT is in good company. Hammerson, Canary Wharf Group, Tritax EuroBox, LondonMetric, Derwent London, Berkeley Group and Workspace are among the other real estate names to tap the green and sustainability-linked bond markets, either committing to use the proceeds on valid projects or linking the cost of their borrowing to ESG metrics. Many companies have found a pricing benefit in such deals.
At Derwent, group treasurer Jay Joshi said earlier this year that real estate will eventually shun bond deals that lack a link to sustainability. “We’re maybe one or two refinancings away from most financing in our sector being green,” he said. And this month, Lazard’s Richard Wilson described sustainable finance as “the buzzword of the moment in the debt capital markets” in an EG podcast and agreed that sustainable finance will become the norm.
“The consistent message that we are hearing from the CFOs of large UK real estate companies is they want all future debt raises to be aligned with their sustainability goals,” Wilson said. “We all know how important sustainability is for stakeholders of not just real estate companies, but the corporate world at large. And this attitude is very much in line with what we’re seeing in the wider debt capital markets, not just in real estate. In my personal expectation, the question will shift to ‘why not sustainable finance?’ rather than ‘why sustainable finance?’”
But the BIS notes that a fast-growing market needs to be watched ever more closely, particularly if bonds with an ESG element start to account for a greater proportion of investors’ portfolios.
It added: “If the market continues to grow at the current pace, and more elaborate instruments emerge – eg structured products – it will be important not only to assess the benefits of financing the transition to a low-carbon world, but also to identify and manage the financial risks that might arise from a shift in investors’ portfolios.”
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