The recent sale of $2.8bn worth of green bonds by French energy giant EDF could cause a wave of similar issuance from accessing a market that signals a commitment by both issuers and investors to boost their ESG credentials, says Justin Craib-Cox, co-manager of the RWC Sustainable Convertibles fund.
The EDF green convertible bond issuance, alongside straight green bonds from Adidas and Orange, helped deliver a record month of issuance in September, with governments including Germany also turning to green government bonds to fund their own activities.
In total, issuance hit $50bn, with volume up five times from August, and Craib-Cox said this sent out a signal that even amid volatile markets, this kind of financing continues to have strong demand from investors.
“Issuing a convertible bond in volatile times covers off two bases. Where the outcome is positive, an investor is tapping into potential upside, while the bond component protects against downside if equity prices fall. Thanks to the highly-successful EDF issue, potentially more issuers are going to look at this form of financing in the current conditions,” he said.
“Clearly the green revolution is arriving in Europe, and the recovery certainly looks to be centred around that. The market for green convertible bonds is still small – EDF’s was the largest issuance of its kind. But there is clear growth potential as more firms look to target green improvements and signal commitment to improving their ESG profiles, amidst a climate of volatile market conditions. Using a green convertible means that issuers can invest in projects where investors are focused on the improvement to the company’s equity value, not just the issuer’s ability to repay.”
The value of green bonds issued so far this year has climbed to more than $176 billion, a 26% increase from the same period in 2019.
Craib-Cox argues that 2020, a year full of volatility and uncertainty, is a good time for more firms to look to green convertible bonds as a financing source.
“In the volatile markets we’re currently experiencing there is an added case for an equity-linked green bond. Investors would normally expect a utility provider, for example, to be a fairly stable investment, but there is a huge change taking place in the economy.
“As a result, investors in the EDF issue are getting a good deal. Although EDF is not currently paying a dividend, when it does, the holder of the EDF green convertible bond will receive a dividend pass through, in the form of an adjustment which means they’re going to get more shares upon conversion. This wouldn’t necessarily happen in a non-volatile market where it’s an issuer who has more power to dictate terms.”
”What ultimately makes the EDF green convertible bond issue noteworthy is the timing of the issuance”, adds Craib-Cox.
“A relatively stable, sleepy company which is in large part owned by the French state, is offering something quite different, and much bigger than is typical for this kind of investment. This is because, in a volatile market, issuing a specifically convertible asset offers an upside that just isn’t as relevant in normal times, or with a run-of-the-mill green bond.
“There is also an issue in the industry whereby what gets a green stamp is debatable. Take a company such as Tesla, which is well-known to have issued convertible bonds. Were they green-specific bonds? No. Does Tesla more or less do something which is considered by investors and the general public to be contributing to a carbon-free future? Yes.”
“The fact we’ve now seen such a large green-badged issuance, signals the intent to differentiate and make obvious the need for green-specific convertibles as this market continues to develop.”