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By Bodo Winkler, Head of Investor Relations & Credit Treasury, Berlin Hyp AG

Following the successful issue of the first Green Pfandbrief in April 2015, Berlin Hyp placed its first senior unsecured green bond in benchmark format on the market on the 19th of September 2016, making the bank the first issuer to offer green bonds in more than one asset class. Berlin Hyp is also the first bank to document and publish a green bond programme that foresees and defines issues in both asset classes. The proceeds from the bond are always used to refinance loans for the acquisition, renovation or development of green buildings.

Over the last few years, the market for green bonds, where the proceeds from the issue are used for defined projects with a positive impact on the environment, has seen a rapid development. The market segment was only established in 2007 when the European Investment Bank (EIB) issued its first Climate Awareness Bond. Multilateral and national aid and development institutions initially dominated the market, with the first banks not appearing on the scene with euro benchmark bonds until 2015, when Berlin Hyp issued its first Green Pfandbrief. Since then, various other banks have followed suit, primarily from Europe and China, but only with unsecured bonds. The volume of outstanding bonds on the green bond market has at least doubled on an annual basis since 2012 and now exceeds the USD 150 billion mark.

Hardly any other market is experiencing such dynamic growth. In the current year, green bonds with a value of around USD 60 billion have been issued, well above the issue volume of around USD 48 billion for the full year 2015. The breakdown of issuers is also an indication of the huge growth potential of the market. For the first time, development banks rank second only behind banks which accounted for more than one third of the issues to date.

The reasons why not even more banks have yet entered the market are varied. The fact that green bonds require much more preparation than conventional bonds appears to be a key factor for many banks. In addition, the intended use of the proceeds of the issue must be clearly defined in detail. Processes for selecting projects must be established and it must be ensured that the proceeds are only used for suitable projects. Investors also demand an annual report on the actual use of the proceeds and the specific impacts of the projects on the environment. Finally, the sustainable effect of a green bond needs to be verified by an independent body or auditing company, usually a sustainability rating agency in the form of a second opinion. The issue of green covered bonds is also restricted by the artificially distorted and low spread as a result of the European Central Bank’s (ECB) purchase programme.

“The benefits of green bonds are evident – especially in the real estate sector.”

Real estate, depending on the source quoted, accounts for 30-40% of the energy needs and is responsible for around one third of CO² emissions. The bank supports the financing of energy-efficient buildings by granting a discount of between five and 10 basis points for loans. It thereby actively contributes to reducing energy needs and CO² emissions. The issue of sustainability is also an integral part of Berlin Hyp’s corporate culture. The financing of green buildings and their refinancing via green bonds represents some of the sustainability measures that directly relate to its core business: commercial real estate financing. After all, it offers investors added value that considerably exceeds the interest rate and own creditworthiness. In return, green bonds offer the bank the opportunity to broaden its own investor base.

While Berlin Hyp has attracted 15 new investors with its Green Pfandbrief and generated an order book that was oversubscribed by a factor of four, the order book for the green unsecured bond had as many as 35 investors who had never subscribed to a Berlin Hyp bond before. The composition of the order book, almost oversubscribed by a factor of two and a half, was more international than any other of the bank’s previous unsecured benchmark bonds. While German investors generally account for around 80 of such issues, almost half of the green bonds went abroad.

These facts could also encourage other banks to refinance loans secured by suitable real estate via green bonds. This would be highly welcome. If this is achieved through covered bonds, then all the better! The Initiative on Energy Efficient Mortgages launched by the EMF-ECBC on the 21st of September 2016 could make another important contribution towards this.

This article was originally published in the September 2016 edition of the EMF-ECBC Market Insights & Updates newsletter. Please note that any views or opinions expressed in this article are those of the authors and not necessarily those of the EMF-ECBC.  This article does not constitute investment advice.

Bodo Winkler spoke about green financing at the 24th ECBC Plenary meeting in Düsseldorf on the 14th of September 2016. Watch the highlights of the panel debate below: