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Bond market to go ‘green’ this year: S&P

The "green" corporate bond market will double in size this year, according to Standard & Poor's ratings services, as investors seek to diversify their portfolios and becoming increasing interested in socially responsible investing.

"Climate" or "green" bonds work like any other debt-based financial instruments, except that the money raised is only invested in environmentally friendly projects. They can be issued by governments, non-governmental organizations, corporations or banks.

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Corporate issuance currently makes up under one-third of the total green bond market. However, S&P forecasts corporate bond issues will increase rapidly this year to reach $20 billion, up from the current $10.4 billion.

The total corporate bond market stood at $18 trillion dollars at of April 2013, according to S&P.

"Corporate green bond issuance is accelerating not only because this aids diversification of investor pools for issuers, but also because of investors' growing interest in implementing environmental, social, and governance goals," wrote S&P analysts led by Michael Wilkins in a report out on Tuesday.

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S&P's forecast came after a green bond from French power company GDF Suez last week broke previous records. At 2.5 billion euros ($3.4 billion), the money raised from the issue was almost double the previous record of 1.4 billion euros set by another French power company, Electricite de France (EDF).

"These mega deals show the rising importance of green bonds as a source of capital, driven by both the needs of corporates, as well as the desire by investors to allocate capital to socially responsible and environmentally sustainable investments. The aim for both issuers and investors alike is to develop a large and liquid market in order to reduce transaction and investment costs," Wilkins said.

The Climate Bond Initiative, a not-for-profit organization based in London, estimates the overall green bond market will reach $40 million this year and a $100 billion in 2015.

"The bulk of the growth is going to come out of corporate growth," said Sean Kidney, the organization's CEO, on Tuesday. "It is not a substantial new volume of money, but it does create a large liquid market."

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S&P forecast green issuance would increasingly move to mainstream corporations and away from multilateral banks.

"In the future, we expect corporate green bonds could be issued by a variety of industry groups, and will likely be concentrated industries that are considered lower-risks, are already experience good growth, and where upfront costs tend to be smaller," said Wilkins.

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So far, corporate green bonds have mostly been issued in Europe, generally with investment-grade ratings of "A+" or "A". Utilities companies have led the way and coupons have averaged around 2 percent, suggesting bonds are being marketed as low-to-moderate return investments.

Future trends in the market could include increased structuring of green bonds to enhance credit support, according to S&P. Toyota has already issued the first-ever auto asset-backed security, which was securitized on car loans and used to fund green car development.

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Kidney forecast that between $4 billion and $8 billion would be raised by project and asset-backed green bonds before the year was out.

He added: "Because the market is now reaching a reasonably large size, with bigger benchmark issuance, some of the investors who have been sitting on the sidelines are coming into play, like the big insurers. Previously they said they needed illiquidity premium—now that's clearly not the case."

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