Financing Renewable Energy Projects in Germany and Malaysia through Green Bonds
Executive Summary
Green bonds are often associated with funding of renewable energy projects, but they are not widely utilized by industry players. In fact, they make up only 1.9% of the total amount issued by corporates in Bloomberg’s Fixed Income Database.
Renewable energy companies have issued green bonds in 27 countries. Surprisingly, the number of green bonds issued is highest in Malaysia. This market is unique, featuring exclusively Islamic bonds issued in the local currency, even by multinational corporations.
When directly comparing issuers in Germany and Malaysia, Malaysian bonds appear to pose comparatively lower risks compared to respective government bonds in this specific issuance class.
Introduction: Over the past few years, there has been a surge in popularity for green bonds as a sustainable funding option. The IFF’s sustainable debt monitor has reported an incredible 100-fold increase in the amount of green bonds issued, rising from around 1.6 billion USD in 2013 to over 160 billion USD in 2021. This growth has primarily been driven by issuances in mature markets. While there was a recent dip in issuances, the graph below shows that emerging market issuances are already recovering and demonstrate great potential for future growth. In today’s market, one-third of the total outstanding green bonds have been issued by sovereigns and governments, including municipalities. The remaining issuances are divided among the financial sector, non-financial sector, and supranational companies.
It is commonly assumed that green bonds are used to finance renewable energy projects, but when looking at the universe of corporate green bonds, only 1.9% of the amount issued can be directly attributed to the renewable energy industry. When conducting a search on Bloomberg’s Fixed Income Database for corporate green bonds using the industry classification variable BICS 2 to specify renewable energy, it was observed that fewer than 300 out of approximately 6000 corporate green bonds were returned. The graph below depicts the total amount of corporate green bond issuances, around 1.5 trillion, while the total issuances associated with the renewable energy industry amount to 29.5 billion, approximately 1.9%.
This discrepancy can be attributed to the fact that the industry classification variable primarily encompasses project developers and renewable energy companies. The variable does not include other large companies building their own behind-the-meter renewable energy projects or energy giants developing renewable energy as a side business. The allocation of green bond funding towards companies exclusively engaged in renewable energy businesses thus represents only a very small part of the pie.
Renewable energy companies have utilized green bonds to fund projects in as many as 27 countries, with Malaysia emerging as a particularly noteworthy market. Although the amount issued in Malaysia is smaller than major markets like China or the USA, the developing Southeast Asian nation stands out as the leader in terms of the number of issuances, boasting an impressive 97. What sets Malaysia apart from other developing economies, such as Turkey, Peru, or Panama, is that all of its bonds are issued in the local currency, the Malaysian Ringgit (MYR). Moreover, all of the bonds issued are Islamic bonds.
This can be explained by the country’s strong and locally rooted sustainable finance ecosystem. It has been created through the persistent support and advocacy of national financial regulators, including tax incentives, grants, and capacity building for Malaysian financial intermediaries. Malaysia has continued to develop and innovate Shariah-compliant green and sustainable financial instruments since the launch of the Sustainable and Responsible Investment (SRI) framework for Sukuk in 2014.
In a recent development, the Spanish multinational company Solarpack issued 38 tranches in April 2023 to fund a large-scale solar project under Malaysia’s SRI framework. This marked the company’s first-ever green bond issuance, which complied with the ASEAN Green Bond Standards and the International Capital Market Association’s Green Bond Principles. By utilizing this framework, Solarpack was able to diversify its debt financing sources beyond the loan market, making the issuance a landmark transaction for the company.
When directly comparing spreads and yields payed by issuers in Malaysia and Germany, it appears that German bonds face a higher risk premium when compared to government treasuries. In both countries, the bond issuances were limited to six unique companies. However, the Malaysian market saw a higher volume of issuances, resulting in the division of debt into more tranches. Notably, while German issuers focused exclusively on wind and solar projects, Malaysian issuers funded a mix of hydro and solar projects. One such example is ‘Telekosang Hydro One’, which utilized the proceeds to construct a 24MW run-of-the-river hydro plant and created the world’s first mini-hydro Sukuk. The longer maturities in Malaysia, averaging around 10 years, may be due to the more frequent use of long-term Power-Purchase-Agreements, which some issuers, such as Telekosang and reNIKOLA Solar, mentioned upon issuance of their bonds. In contrast, the average maturity of German bonds is closer to 5 years.
Given the shorter maturities and the fact that the German market and renewable energy industry are well established, it is surprising that German issuers on average display a higher spread over government bonds than Malaysian issuers. The graph below illustrates current average G-spreads per issuer, representing the difference in yields to treasury bonds with the same maturity. Moreover, German bonds yield a higher absolute return hinting at a lower risk perception of Malaysian companies within this specific issuance class.
Among German bonds, the bond issued by wind turbine manufacturer Senvion was excluded due to default in 2019. This could be another indication that the composition of companies issuing green bonds in Germany is fundamentally different from companies in Malaysia. The issuance of green bonds within the fiercely competitive German market may suggest that a high-risk enterprise is resorting to the green bond label as a final recourse. Conversely, employment of the green bond label in Malaysia may indicate a pioneering role. However, historical spreads and yields, as well as a larger bond universe and credit ratings, would need to be examined to explore this assumption in more detail.
Conclusion: While green bonds have been utilized by renewable energy companies in 27 countries, they still only make up a small percentage of the total amount issued by corporates globally. The Malaysian green bond market stands out as unique, featuring exclusively Islamic bonds issued in the local currency even by foreign corporations. Surprisingly, Malaysian bonds appear to pose comparatively lower risks than German bonds in this category, despite the well-established renewable energy industry in Germany. Further analysis is needed to examine whether this is due to composition effects arising from self-selection of risky companies issuing green bonds in Germany.