Wall Street's new battleground is green-bond market worth over US$135b

London

WALL Street's race is on for dominance in the fast-growing business of turning back climate change.

HSBC Holdings plc, Citigroup Inc and Bank of America Corp have helped power an unprecedented surge in sales of "green" bonds, which are used to finance everything from wind farms to battery technology.

They've toppled smaller banks like Sweden's SEB AB, that pioneered what was once on the fringes of international finance but has now garnered mainstream appeal.

"I do think this is a new battleground," said Farnam Bidgoli, head of sustainable bonds for Europe, the Middle East and Africa at HSBC, which has sold more of the debt than any other bank this year. "All the banks are setting up sustainable finance teams."

As banks grapple with a slowdown in traditional engines of growth such as lending and trading, they're seeking to capitalise on a boom in green finance. Global green-bond sales have already beaten last year's record US$135 billion well before the end of 2019. Issuance of the securities has more than quadrupled in the past five years, according to Bloomberg data. The sales boom is being driven by corporations and governments raising funds to invest in initiatives to help them meet commitments to cut fossil fuel use, embracing principles of The Paris Agreement on climate change.

The biggest users of the market are sovereign borrowers, such as France which has issued around US$4 billion in green bonds this year. France is a prominent supporter of international initiatives to tackle climate change, including the European Union's objective to achieve at least 40 per cent cuts in greenhouse gas emissions from 1990 levels by 2030.

But corporations are catching up. Companies now dominate overall issuance, even if the individual transactions are smaller in size than sovereign deals. Sovereign borrowers' share of the new bond volumes has shrunk to 29 per cent this year. Five years ago, they accounted for more than half the market.

Telecoms groups such as Vodafone Group plc and Verizon Communications Inc aiming to reduce energy consumption alongside power firms funding renewable energy investments like E.ON SE and Iberdrola SA, are among prominent corporate issuers this year.

This "exponential growth" is driven by demand from investment funds that are increasingly likely to seek assurances on the environmental or social credentials of what they are financing, according to HSBC's Ms Bidgoli, who expects similar growth rates at least until 2021. "Demand from investors continues to exceed the issuance that you see."

That's left banks moving to expand their green bond businesses quickly. Goldman Sachs Group Inc created a "sustainable finance group" earlier this year, charged with finding ways to address demand from investor and corporate clients. Other lenders have also hired debt capital markets bankers to drive expansion in the market.

Explosive demand for green finance has so far had little effect on the cost of borrowing because record low interest rates are squeezing yields across all classes of debt.

"Some issuances have priced better than non-green bonds but by and large these differences are quite small," said Jon Williams, a partner at PwC specialising in sustainability and climate change. BLOOMBERG