Apple's Green Light Indicates Growing Interest

Green bonds have matured, the asset class has outgrown the infancy phase and it's here to stay. Apple Inc. issued several green bonds this and last year, fuelling corporate involvement in the asset class. But what are green bonds, what are the benefits and what are the pitfalls?

What is a green bond?

The generally accepted definition of a green bond is: "A bond whose investments are used to fund environment-friendly projects". The bonds often have a tax-exempt element, but there are taxable green bonds as well. Green bonds are also referred to as "climate bonds" - bonds whose investments are linked to projects battling climate change - but we have also seen references to "social (responsible) bonds", "sustainable bonds" and "ESG bonds." Another acronym that pops up in the green bonds space is PACE (Property Assessed Clean Energy), financing or securitisation. You can read up on PACE in these two articles: " Property Assessed Clean Energy (PACE) securitisation market on the rise" and " It's coming at a rapid PACE".

No longer green as grass

Green bonds have been around now for a good 10 years. The first green bond - the Climate Awareness Bond - was issued in 2007 by the European Investment Bank (EIB) to finance renewable energy and energy efficiency projects. This was listed on the Luxembourg Stock Exchange (LSE). In 2016, the LuxSE launched the Luxembourg Green Exchange (LGX), creating a dedicated platform for green securities. Six years after the first green bond issuance, in 2013, the first corporate green bond was issued. Now, in 2017, the green bonds market is around US$200bn in outstanding bonds, coming from just under US$1bn in 2007 and US$11bn in 2013.

Based on the outstanding green bonds year to date, one cannot deny the asset class is here to stay. Furthermore, corporates are willingly jumping on the bandwagon, fuelling the growth. One of those companies is the renowned iPhone manufacturer Apple Inc. At the beginning of last year, Apple Inc. issued a large green bond, worth US$12bn. In June of this year they issued another green bond, worth US$1bn, to fund environmentally focussed initiatives. The latest Apple green bond will run for 10 years, has a coupon of 3% and yields 82 base point spread (bps) over comparable US treasuries.

Projects need to have sufficient green ambition

We have seen the definition of what a green bond is, however the definition does leave (a lot of) room for interpretation. So one might ask, when is a project...