Lower Default Risk for Green Projects - Moodys
(19 September 2018 - USA) Environmentally friendly infrastructure loans have lower default risk than non-green projects according to a report published Tuesday from New York-based Moody’s Investors Service.
Moody’s research finds significant distinctions related to default and recovery rates between environmentally friendly and non-green projects. Project finance loans for green projects demonstrate a lower risk of default compared to loans for other kinds of projects, the report finds, particularly in advanced economies. The research revealed a ten year cumulative default rate of 5.7 percent for green projects compared to 8.5 percent for non-green projects. The research categorized the projects within the study based on criteria established under the Green Bond Principles published by the International Capital Markets Association (ICMA), which defines projects as green when they involve renewable energy, energy efficiency, pollution prevention, clean transportation, climate change adaptation and environmental conservation.
“Our analysis of thousands of project finance bank loans examined various industry sectors that align with our definition of infrastructure. We further split the data into green and non-green projects and found significant distinctions related to default and recovery rates,” says Kathrin Heitmann, vice president and senior analyst at Moody’s.
The Bloomberg Barclays MSCI Green Bond index outperformed the Barclays Global Aggregate from December 2013 to October 2017, in terms of equivalent bond returns. An HSBC survey of 1,731 companies and institutional investors worldwide, carried out in May and June, found financial returns and tax incentives were the main drivers of green investment. In Hong Kong, a third of respondents said their main focus was on financial returns when investing in green bonds or similar assets, while about the same number cited tax incentives. “Investors are now making their decisions on whether to invest in a green bond based on commercial returns. This is a good indicator that investors are not purely making such investments for charity but they are really believing such investment can make money,” said Daniel Klier, HSBC’s group head of strategy and global head of sustainable finance. Mr Klier said investors are increasingly choosing green products on expectations of better returns. He said green bonds have become more attractive because they usually offer an interest rate 1 per cent higher than traditional bonds.
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