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Green bank borrowing sets down roots

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Green bank borrowing sets down roots

Green bonds represent a small share of bank borrowings. However, that proportion is expected to rise considerably in the coming years. Miroslav Petkov, Director in the Sustainable Finance Team of S&P Global Ratings, considers the recent – and future – growth of banks’ green issuance

Banks have a significant role to play in the transition to a low-carbon economy. As key providers of funding, it matters where they put their money. Banks have already boosted their issuance of green bonds – toUS$27 billion in 2017 from US$1.5 billion in 2014, based on Climate Bonds Initiative (CBI) data(adjusted to include green bonds for large-scale hydro or clean coal projects). Over the same period, the number of banks making their debut in the green bond market increased to 72 from just five (see chart: Number of Banks Issuing Their First Green Bond). And with climate change a priority on global political and economic agendas, we believe that this strong growth will continue. 

Green beginnings

Miroslav Petkov

Miroslav Petkov

The OECD estimates that green investment will likely have to exceed US$4.3 trillion annually in order to meet ambitious climate goals – led by the Paris Agreement target of keeping global warming from rising 2°C above pre-industrial levels. In the EU, U.S., China and Japan, which represent the best-established bond markets, the equivalent amount is $2.2 trillion, with about one-third of that projected to be financed through loans. The amount of green bonds that banks are currently issuing is small compared to the OECD’s estimates of required annual green investment.

Green bonds also represent only around 0.5% of banks’ total current borrowings, and a nominal amount of total bond issuance (about 1% in 2017). What’s more, green bonds have not yet become a regular channel for raising capital for many banks. The large majority of the top 200 banks – about four-fifths – haven’t yet issued any green bonds.

But as the realities of climate change set in, green investments are increasingly in demand. As such, banks around the world may face peer and investor pressure to ramp up their efforts in the green bond market. Green bonds can provide the means for banks to finance green investments and increase the proportion of their funding that is considered green. And we believe that banks can subsequently use their status as issuers of green bonds to other ends as well, in particular, to demonstrate to stakeholders their own contribution to the low-carbon economic transition.

Climate Bonds Initiative Chart

Climate Bonds Initiative Chart

What do we mean by “green”?

Many banks are still in the process of defining what green assets actually are. This is because identifying green investments within a bank’s portfolio is challenging. While there are many initiatives to define what green investments are, the reality is that there are shades of green depending on the investment’s contribution to the transition to low-carbon economy.

Moreover, if banks understate their green portfolio, they face the increased risk of unfavourable comparison to their carbon-intensive portfolios. And with some nongovernmental organisations monitoring and reporting on these, this could raise reputational risks.

So bank issuers rely on standards to define which investments are green. The Green Bond Principles (GBP) are the most widely used. A notable exception is China, where all onshore green bonds follow the People’s Bank of China’s (PBoC) guidelines.

Green bond frameworks

One factor that defines the level of greenness of banks’ green bond issuance is their green bond framework. Banks typically set up such a framework to define how assets financed through green bonds are selected – and how the proceeds are managed thereafter. The framework also covers reporting on the use of proceeds.

Often, most of the assets backed by green bonds are existing financings. In that sense, such green bonds do not generate new green assets. However, we believe the green bond market will stimulate banks’ future green financings as it would allow banks to issue green bonds once they have generated sufficient volume of new green assets through their lending activities.

What we also see is that banks’ green portfolios are dynamic – increasing or decreasing with new issuance, redemption, and reclassification of green assets or lending. Most green frameworks allow for the possibility of the amount of the green portfolio to drop below the green bond proceeds temporarily, with the balance invested in money market instruments or other green bonds. However, in practice, the green bonds portfolio typically exceeds green bond issuance for most banks by a substantial margin – some even by more than 50%.

A global, green landscape

Notably, Chinese banks have contributed significantly to the increase in green bond issuance. This has been as a result of the government’s decision to create and formalise a green financial system in China – and the subsequent publication of green bond guidelines by the PBoC in 2015. Now, Chinese banks represent more than 50% of total green bond issuance by banks, as well as around 40% of the number of green bond issuing banks. (see chart: Breakdown of Bank Green Bond Issuance By Region).

China stands out in other ways, too. Pollution prevention and clean transportation represent the largest share of green bond allocation in the country. In contrast, for around two-thirds of the top 200 banks outside of China, renewable energy and green buildings hold more than a 90% share.

Breakdown Of Bank Green Bond

Breakdown Of Bank Green Bond

Moreover, the majority of banks’ green assets operating in developed countries are located in their own region. In turn, this may have implications for reaching global climate change goals, as – according to the Paris agreement – developed countries need to work to contribute to the green transition in emerging markets.

We observe that the contribution of banks in developed countries to that transition is currently limited. For some developed banks, this may reflect their more limited market presence in emerging markets overall. For others, the key reason may be the typically higher credit risk of investments in emerging markets.

We expect all banks to continue to grow their share of green bond issuance in the near future. By significantly expanding their contribution to the green bond market, banks can work alongside corporate, municipal and sovereign issuers – and strive to meet the ambitious climate change targets.

To find out more, please read S&P Global Ratings’ report entitled “A Look At Banks’ Green Bond Issuance Through The Lens Of Our Green Evaluation Tool”, available online here.

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Tech demand drives Asia’s factory revival, China’s slowdown puts dampener

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Tech demand drives Asia's factory revival, China's slowdown puts dampener 1

By Leika Kihara

TOKYO (Reuters) – Solid demand for technology goods drove extended growth in Asia’s factories in February, but a slowdown in China underscored the challenges facing the region as it seeks a sustainable recovery from the shattering COVID-19 pandemic blow.

The vaccine rollouts globally and pick-up in demand provided optimism for a vast number of businesses that had grappled for months with a cash-flow crunch and falling profits.

In Japan, manufacturing activity expanded at the fastest pace in over two years while South Korea’s exports rose for a fourth straight month in February, suggesting the region’s export-reliant economies were benefiting from robust global trade.

On the flip side, China’s factory activity grew at the slowest pace in nine months in February, hit by a domestic flare-up of COVID-19 and soft demand from countries under renewed lock-down measures.

“The big picture, supported by the latest figures, is that China’s growth remains fairly robust, but it is slowing from previously very rapid rates,” Mark Williams, chief Asia economist at Capital Economics, wrote in a note to clients.

China’s was the first major economy to lead the recovery from the COVID-19 shock, so any signs of prolonged cooling in Asia’s engine of growth will likely be a cause for concern.

With the global rebound still in early days, however, analysts say the outlook was brightening as companies increased output to restock inventory on hopes vaccine rollouts will normalise economic activity.

“The recovery in durable-goods demand is continuing, which is creating a positive cycle for manufacturers in Asia,” said Shigeto Nagai, head of Japan economics as Oxford Economics.

“As vaccine rollouts ease uncertainties over the outlook, capital expenditure will gradually pick up. That will benefit Japan, which is strong in exports of capital goods,” he said.

China’s Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 50.9 in February, the lowest level since last May but still above the 50-mark that separates growth from contraction.

That was in line with official manufacturing PMI that showed factory activity in the world’s second-largest economy expanded in February at the weakest pace since May last year.

Activity in other Asian giants remained brisk.

The final au Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) jumped to 51.4 in February from the prior month’s 49.8 reading, marking the fastest expansion since December 2018, data showed on Monday.

In South Korea, a regional exports bellwether, shipments jumped 9.5% in February from a year earlier for its fourth straight month of increase on continued growth in memory chip and car sales.

The Philippines, Indonesia and Vietnam also saw manufacturing activity expand in February, a sign the region was gradually recovering from the initial hit of the pandemic. (This story corrects to add name of institution linked to analyst comment in paragraph 5)

(Reporting by Leika Kihara; Editing by Shri Navaratnam)

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China’s factory activity growth slips to nine-month low – Caixin PMI

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China's factory activity growth slips to nine-month low - Caixin PMI 2

BEIJING (Reuters) – China’s factory activity expanded at the slowest pace in nine months in February as weak overseas demand and coronavirus flare-ups weighed on output, adding pressure on the country’s labour market, a business survey showed on Monday.

The slowdown in the manufacturing sector underscores the fragility of the ongoing economic recovery in China, although domestic COVID-19 cases have since been stamped out and analysts expect a strong rebound in full-year growth.

The results back an official survey released over the weekend showing China’s factory activity expanded at the weakest pace since last May.

February also saw the Lunar New Year holidays, when many workers return to their hometowns, although this year saw far fewer trips amid coronavirus fears.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 50.9 last month, the lowest level since last May.

Analysts polled by Reuters had expected the index to remain unchanged from January’s reading of 51.5. The 50-mark separates growth from contraction on a monthly basis.

“Overseas demand continued to drag down overall demand…Surveyed manufacturers highlighted fallout from domestic flare-ups of Covid-19 in the winter as well as the overseas pandemic,” said Wang Zhe, senior economist at Caixin Insight Group, in comments released alongside the data.

A sub-index for production fell to 51.9, the slowest pace of expansion since April last year, while another sub-index for new orders fell to 51.0, the lowest since May.

Export orders shrank for the second month. Factories laid off workers for the third month, and at a faster pace, with Wang noting “companies were not in a hurry to fill vacancies.”

An index of confidence in the year ahead rose however to 63.0, the highest since October. Input and output prices continued to rise albeit at a slower pace.

“Now the major challenge for policymakers will be maintaining the post-coronavirus recovery while paying close attention to inflation,” Wang added.

Analysts from HSBC this week forecast that China’s economy would grow 8.5% this year, leading the global recovery from the pandemic.

(Reporting By Gabriel Crossley; Editing by Ana Nicolaci)

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Oil prices climb after progress on huge U.S. stimulus bill

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Oil prices climb after progress on huge U.S. stimulus bill 3

By Jessica Jaganathan

SINGAPORE (Reuters) – Oil prices rose more than $1 on Monday on optimism in the global economy thanks to progress in a huge U.S. stimulus package and on hopes for improving oil demand as vaccines are rolled out.

Brent crude futures for May rose $1.07, or 1.7%, to $65.49 per barrel by 0042 GMT. The April contract expired on Friday.

U.S. West Texas Intermediate (WTI) crude futures jumped $1.10, or 1.8%, to $62.60 a barrel.

“Oil prices are recovering this morning in line with most risk assets on the back of the U.S. stimulus bill passing the House and as central banks continue to sabre rattle to ward off market-implied financial tightening,” Stephen Innes, chief global markets strategist at Axi, wrote in a note on Monday.

U.S. House of Representatives passed a $1.9 trillion coronavirus relief package early Saturday. Democrats who control the chamber approved the sweeping measure by a mostly party-line vote of 219 to 212 and sent it to the Senate, where Democrats planned a legislative manoeuvre to allow them to pass it without the support of Republicans.

More positive news on the coronavirus vaccination front and signs of an improving Asian economy also boosted prices.

A U.S. Centers for Disease Control and Prevention advisory panel voted unanimously on Sunday to recommend Johnson & Johnson’s COVID-19 shot for widespread use, and U.S. officials said initial shipments would start on Sunday.

J&J expects to ship more than 20 million doses by the end of March and 100 million by midyear, enough to vaccinate nearly a third of Americans.

Over in Japan, a private survey showed factory activity expanding at the fastest pace in over two years in February, adding to signs of a rebound in Asian growth.

On the flip side, investors are betting that this week’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies, a group known as OPEC+, will result in more supply returning to the market.

“More supply needs to come onto the market to ensure OPEC+ meets incremental demand and keeps internal discipline ducks in a row,” Innes added.

(Reporting by Jessica Jaganathan; Editing by Shri Navaratnam)

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