Green Bonds for Green Ammonia

Access to significant and competitively priced long-term financing is a crucial piece of the puzzle to enable the energy transition. Green Finance and Green Bonds can directly contribute to the decarbonisation of ammonia and future production of green ammonia fuel, helping to deliver the Paris Agreement’s preferred target of keeping warming below 1.5 °C.

A recent Ammonia Energy article, Green ammonia is key to “making Yara carbon-neutral by 2050,” referred to the announcement by Yara that the margin earned by financiers on a $1.1 billion financing agreement will be adjusted based on Yara’s progress to meet its carbon intensity target by 2025. This development is hugely welcome and gives an example of financiers willing to accept lower returns if the borrower is responsible for less carbon dioxide (CO₂) emissions. Lower CO₂ emissions again lead to a lower perceived risk level, inferred from a more stable and/or more defensible long-term profitability. Yara is thus taking steps to mitigate climate risks and protect its competitive position in a scenario with, hopefully, a higher and more universal price on carbon.

What is Green Finance, What are Green Bonds?

The Bank of England explains green finance as financing of investments that provide environmental benefits in the broader context of environmentally sustainable development. For example, this could include investments which reduce air, water and land pollution or decrease greenhouse gas emissions, such as investments in renewable energy and energy efficiency.

Environmentally sustainable growth will require tens of trillions of dollars of green investment, globally. The question of scaling up green finance is being addressed by the G20:

The G20 Green Finance Study Group (GFSG)’s work supports the G20’s strategic goal of strong, sustainable and balanced growth. The challenge is to scale up green financing, which, based on a number of studies, will require the deployment of tens of trillions of dollars over the coming decade. The GFSG was established to explore options for addressing this challenge.

UN Environment Inquiry, G20 Green Finance Synthesis Report, September 2016

For Green Bonds, the Green Bond Principles (“GBP”) exist to promote integrity in this market through voluntary process guidelines that recommend transparency, disclosure, and reporting. They are intended for use by market participants and are designed to drive the provision of information needed to increase capital allocation to such projects. With a focus on the use of proceeds, the GBP aim to support issuers in transitioning their business model towards greater environmental sustainability through specific projects.

In other words, issuers of bonds must demonstrate how a particular project fits with a defined set of eligible ‘Green Project Categories,’ show the allocation of proceeds over time, report on actual projects, and provide impact reports detailing benefits created as a result of the project. Management will make assertions and, on a voluntary basis, issuers can appoint (an) external review provider(s) to confirm alignment of their bond with the core components of the GBP.

For the avoidance of doubt, any investment for climate change mitigation or reduction of climate gases is eligible and, as such, projects to produce ammonia from green hydrogen (using renewable feedstock) or blue hydrogen (using fossil feedstock with carbon sequestration) are eligible.

Global Green Bonds Market to Eclipse $200 Billion in 2019

Green Bonds are entry points for investors to impact investment, and the growth of the market has been encouraging, with demand outstripping supply. An example of this demand would be the telecoms company Verizon’s eight times oversubscribed $1 billion Green Bond, in February 2019.

Global Green Bond issuance totalled $66.6 billion in the 2nd quarter of 2019, an all-time high, according to credit ratings agency Moody’s, with the market set to exceed their previous forecast of $200 billion for 2019. A total of $117 billion was issued in the first 6 months of 2019.

Issuers such as Starbucks and Apple have already issued Green Bonds and their Green Bond documentations are often used as a template. Other examples of large corporations issuing Green Bonds are Danone, who have the coupon tied to their Environmental Social & Governance (“ESG”) rating. These corporates acknowledge other benefits such as higher demand, a good story, good diversity of investors and access to other geographies from issuing Green Bonds. However, issuing a Green Bond can also backfire with, for example, Repsol experiencing how reputational risk can play out by way of getting bad press which highlighted that whilst the Green Bond proceeds were allocated for the enhancement of refineries, Repsol at the same time continues to drill for more oil.

Green Bonds for Green Ammonia

Some of the characteristics of future projects using green or blue hydrogen for ammonia production should prove be very appealing for fixed income ESG investors and pension funds looking match the tenor of investments with their long-dated liabilities. These characteristics include:

• the longevity of ammonia plants;
• the sizeable capex requirements for decarbonising existing ammonia fertilizer production as well as for building out new ammonia fuel production;
• decentralised plants taking advantage of local renewable energy resources;
• the already established international trade in ammonia as a commodity; and, of course,
• significant potential of reducing CO₂ emissions from sizeable single projects.

Areas with large renewable resources can use ammonia as an energy carrier to export renewables and, therefore, investments in ammonia plants can provide downside protection and less volatile returns by way of diversifying revenues for integrated projects, and not relying on revenues from only electricity or hydrogen sales. Combined, these are credit supportive factors appreciated by fixed income investors.

Kristoffer Olsen, CFA, is an independent consultant with a varied financial institutions background and recent business development and investor relations experience at a water electrolyser manufacturer. He is a former board member of the Ammonia Energy Association.