With regard to green bonds, the ability to sell is similar to all other conventional bonds. Green bonds, in the main, have the same characteristics as a conventional bond in terms of credit rating, parent guarantees and legal characteristics. The major difference with a green bond is the commitment to ring-fence proceeds for a specific purpose. The ring-fencing element does not differentiate the bond when selling into the secondary market—therefore, November 2019 it makes no difference whether the bonds are green, brown, or have no colour at all. What really matters when selling, as with all bonds, are factors such as the size of issue, the credit rating, the currency of issue and maturity.
However, a different situation presents itself on the buy side, since green bonds are currently such a small segment of the overall market. The US corporate bond market, for example, is estimated to be $9trn in size—US$ corporate green bonds amount to approximately $100bn2, a much smaller pool of bonds from which to buy. Therefore, the relative scarcity of green bonds, all else being equal, should make them less liquid for buyers. How does this play out in reality?
When analysing traditional measurements of liquidity within the green bond space, the evidence is encouraging. Bond liquidity is evaluated using factors such as market growth, new issuance activity, dealer inventories, and the bid/offer spread in the marketplace.
The following assesses each of these one by one, in the context of green bonds:
The market has experienced substantial and sustained growth over the past five years. Outstanding issuance in the market is estimated to have risen above $650bn2 in 2019, but equally important has been the growing diversification of issuance in recent years. The green bond market is becoming increasingly reflective of the broader investment grade bond market. The graph below illustrates how the market was initially dominated by the multilateral development banks, but has broadened to include government-related entities, corporate issuance and, more recently, sovereigns.
Sovereign issuance into the market is significant in the context of liquidity—for example, the French OAT green bond issue is now over €20bn in size, having been tapped on seven occasions following the original launch size of €7bn in January 2017.2 France is now one of more than ten sovereigns issuing green bonds, with others such as Germany and Sweden set to soon follow.2
Telecommunications has been the most recent sector to begin to issue green bonds, with Verizon and Telefonica helping pave the way to an initial $3bn of issuance from this area in the first half of 2019.3