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S&P Ratings: Energy efficient loans, securitization to drive green bond issuance

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S&P Ratings: Energy efficient loans, securitization to drive green bond issuance

Green bonds have yet to become a vehicle for raising capital for many banks, but energy efficient mortgages and securitization should drive issuance in the future, according to a report by S&P Global Ratings.

The rating agency, which reviewed almost all the green bonds issued by the world's top 200 banks that it rates, said lenders are likely to come under pressure from investors to increase their issuance of green debt instruments. About four-fifths of the 200 are yet to issue a green bond, and, of those that have, 65% have only issued one.

Green bonds, which finance environmentally friendly projects such as solar power, account for a tiny portion of the overall debt market, and market participants say banks need to join the push to increase green financing projects in order to meet goals set out by the 2015 Paris Agreement on climate change.

The Paris Agreement aims to keep global temperatures "well below" 2 degrees Celsius above pre-industrial levels.

Banks boosted their issuance of green bonds to $27 billion in 2017 from $1.5 billion in 2014, according to figures from the Climate Bonds Initiative that were adjusted to include green bonds financing large hydro or clean coal projects.

But this only represented 0.5% of banks' total current debt and about 1% of bond issuance, and is well below the amount the Organization for Economic and Co-operation and Development estimates is necessary in order to meet the Paris climate goals, according to the report.

Meanwhile, green bond issuance by corporates was 2% of total bond issuance, S&P said.

The rating agency predicted that opportunities provided by energy-efficient mortgages and green securitization would lead banks to increase their issuance of green bonds going forward.

The report said that many banks were still trying to define what green assets actually are, making it difficult to identify them in a bank's portfolio. Banks' disclosure of green investments does not always represent total bank green lending, raising potential risks for some lenders.

"If banks understate their green portfolios, they face increased risk of unfavorable comparisons to their carbon-intensive portfolios, which some nongovernmental organizations are monitoring and reporting," the report stated. "As such, this could raise reputational risks."

S&P noted that most assets backed by green bonds are existing financing, and as such the bonds do not necessarily generate new green assets. However, it added that, once banks have generated enough new green assets through their lending activities, the green bond market will stimulate future green financings.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.