China’s inexperienced bond issuance sends a pointed sign | USAEMALL.com

Welcome back. Amid the stock exchange carnage prompted by Donald Trump’s “liberation day” tariffs announcement, clean energy companies got off relatively lightly. The iShares Global Clean Energy exchange-traded fund ticked up by 1.2 per cent, as investors retreated to “defensive” stocks with relatively stable earnings, such as renewable-heavy utilities Iberdrola and SSE.

But the fracturing of international trade links threatens serious consequences for the global energy transition. This useful collection of expert views by Carbon Brief sets out some of the key angles.

Clean energy growth in the US will take a major hit, as sectors from electric vehicle manufacturing to solar panel installation struggle to cope with a jump in their input costs. And the waves of disruption will ripple through the world — posing new challenges for Europe, for example, as Chinese and south-east Asian clean tech companies seek to redirect their exports away from the US.

We’ll look further into the implications of the Trump tariffs in the coming days. First, in today’s newsletter, we look at what two new green bond issuances tell us about the outlook for that market. Also today, Patrick explains why tighter pollution standards may create new opportunities for the US’s biggest listed water utility. — Simon Mundy

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green bonds

Green shoots in the global green bond market

While world stock markets were plunged into turmoil this week, a pair of interesting issuances of green bonds — which raise funds for environmentally friendly investment — passed largely unnoticed.

But the two bond issuances — one by the Chinese government, and the other by the European Investment Bank — highlight some important trends in green finance and beyond.

China

China’s first ever sovereign green bond sale, in a London issuance worth Rmb6bn ($825mn), was the smaller of the two transactions in financial size — but not in significance. The timing of the issuance, announced during UK chancellor Rachel Reeves’ January visit, looks like a pointed effort by Beijing to promote its credentials around international co-operation and climate action at a time when Donald Trump is shredding the US’s leadership position on both.

“China and the UK understand the benefits of globalisation,” vice-minister of finance Liao Min said in London this week.

The proceeds of the issuance, which will go towards low-carbon projects in China, are a tiny fraction of the Chinese government’s $4tn annual budget. But the government has signalled an intention to hold more sales in the future. And simply putting in place a framework to use bond proceeds for green purposes can bring “a drive, a discipline” around decarbonisation, argued Patrice Cochelin, managing director of sustainability methodology and research at S&P Global Ratings.

Global issuance of green bonds hit a record $617bn in 2021, only to fall by 10 per cent the next year. But it has gradually ticked up since then, reaching a new high of $622bn last year, according to S&P, which predicts that issuance of green and other sustainability-related bonds will enjoy further modest growth this year.

Europe

That bullish forecast was supported by the investor demand for the EIB’s €3bn green bond issuance this week, which was oversubscribed more than 13 times. The EIB is something of a pioneer in this space, having issued the world’s first ever green bond back in 2007. Since then, the market has developed without a clear, generally accepted rulebook on what green bonds can be used to finance, with issuers largely free to create their own frameworks and definitions.

But in December the EU launched a new voluntary green bond standard dubbed the EuGB, which requires that proceeds be used for projects that are classed as green under the EU’s taxonomy regulation, which sets out definitions of “sustainable” activities. The EIB’s bond issuance is the biggest yet made under the EuGB framework.

In principle, a clear set of standards for this relatively young market should be attractive to investors — and to issuers such as the EIB, which may find taxonomy-linked green bonds a useful tool as it struggles to align its investment portfolio with the EU’s green standards.

Yet it’s far from clear that the EuGB will take off in a big way. ABN Amro analyst Larissa de Barros Fritz wrote in a recent note that only 9 per cent of outstanding green bonds fully align with the EU taxonomy, and warned that the issuance of securities aligned with the EuGB would come with significant additional costs around legal and regulatory compliance.

Those additional costs may prove prohibitive for many issuers given that, as Cochelin warned, there’s no clear evidence yet that green bonds have provided a significantly lower borrowing cost than conventional ones. Investors may like green labels on their bonds, but it’s not clear they’re willing to pay for them. (Simon Mundy)

environmental regulations

Investors seek safety in American Water

US stock market investors had few places to hide on Thursday during the worst sell-off since the 2020 Covid-19 crisis. But one bastion of stability was American Water, which saw its share price increase almost 4 per cent for the day. Its market valuation is up 22 per cent since the beginning of the year while the broad S&P 500 index is down 8 per cent.

New Jersey-based American Water, the largest investor-owned water utility in the US, may stand to benefit indirectly from the Trump administration’s policies for clean water. Even as the administration crusades against environmental regulations, it has spared rules aimed at reducing our exposure to so-called forever chemicals in drinking water, posing a buying opportunity for American Water.

In 2024 under former president Joe Biden, the Environmental Protection Agency tightened the drinking water limits for per- and polyfluoroalkyl substances (PFAS). The Biden rules forced water utilities to adhere to infinitesimal PFAS levels and were hailed by environmentalists.

When Trump’s pick to lead the EPA started to roll back Biden-era regulations, the PFAS rules on utilities were left off the chopping block.

In a statement, the EPA said that under the first Trump administration it began addressing PFAS in drinking water. 

“[The] EPA will continue to evaluate PFAS contamination and how we can cooperatively work with States and others to provide clean, safe drinking water for all,” the agency said in a statement to the FT.

Since the EPA regulations were likely to drive up costs for smaller water companies, this presented a buying opportunity for American Water, chief executive Susan Hardwick told me in an interview.

“We think ultimately it is an opportunity perhaps where it can create some acquisition opportunities,” she said. For other water companies, the PFAS regulations are a new regulatory problem. “It is one more thing that makes their job harder to do.”

“It is probably a fairly long runway before we see any significant impact to our acquisition volume as a result of this but we certainly think it is a catalyst,” Hardwick said, adding: “It is a sales point for us for sure.” (Patrick Temple-West)

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