A total of 84 participants from the bond and financial sector took part in the Joint Seminar held by the International Capital Market Association (ICMA) and SIX Swiss Exchange last week. The focus was on the developments in the Green Bond market in the international and Swiss context. The event was supported by the Swiss Financial Analysts Association (SFAA) and the Swiss Bond Commission (SBC).
Standards promote transparency and credibility
The Green Bond segment is experiencing rapid growth, but still accounts for less than 1% of the overall bond market. The Green Bond Principles of ICMA have made an important contribution to the rapid growth. These are voluntary guidelines that provide criteria for the use of the funds, the project selection procedure, the management of the capital raised as well as ongoing reporting.
Before these guidelines were put in place, Green Bonds were issued almost exclusively by supranational organizations such as the European Investment Bank (EIB) or the World Bank. This changed in 2014 when a large number of well-known financial institutions supported the Green Bond Principles and thus encouraged the market to develop a standardized process that promoted the transparency and credibility of Green Bonds. As a result, the market volume tripled between 2013 and 2014. The issue volume grew further last year to USD 42 billion. For 2016 the market volume is estimated at up to USD 100 billion.
There are various providers pursuing different approaches in connection with the classification of Green Bonds. The services recently launched also include a valuation system from S&P Global Ratings, which enables the investors to comprehensively quantify the impact of Green Bonds on the environment.
Drivers and hurdles in the Swiss environment
The awareness of sustainability is relatively well developed in Switzerland compared to other countries. Nevertheless, Switzerland plays a minor role on the Green Bond map. The factors that are currently hindering the development of Green Bonds include higher requirements in respect of transparency and reporting for the issuers, the lack of tax advantages compared to traditional bonds as well as the limited selection of issuers and the small offer in Swiss francs.
But there are also factors that can act as potential drivers for Green Bonds. From the investor point of view, one such driver is that all bonds issued by a Green Bond issuer have a potentially better credit risk than bonds from issuers that do not issue Green Bonds. This in turn means that it is easier for the issuer to raise funds and promotes variety among the issuers. If the Green Bond market expands further and certain hurdles are removed, Green Bonds could take on a central role in the transition to a more sustainable economy.
Bond market at SIX Swiss Exchange
SIX Swiss Exchange offers a large and truly international bond market. More than half of the over 1'700 listed bonds have been issued by foreign issuers from around 50 jurisdictions on all five continents. In addition, there are over 3'600 international bonds admitted to trading on the Swiss stock exchange. SIX Swiss Exchange also calculates the Swiss Bond Index (SBI), the reference index for CHF-denominated bonds, and uses SIX Corporate Bonds to boost the liquidity of trading in corporate bonds.