England’s green and pleasant bonds

August 18, 2016

If there is one topic that keeps cropping up no matter which circles you are in, it’s the environment. As individuals we are encouraged to ‘think green’ in our daily lives and recycle, car share or reduce our energy consumption. It’s on the politicians’ agenda as demonstrated by December’s Climate Change Summit, and together, this overall increase in environmental awareness is fuelling demand for green or ethical investments.

In fact, in January this year the City of London, the municipal authority which runs the capital’s financial district, launched a Green Finance Initiative (GFI), with the aim of making the capital a focus for such investments in the same way it has become a centre for Islamic finance and Renminbi trading. Sir Roger Gifford, chairman of the GFI said the group will focus on how to mobilise the capital required to implement both the UN’s sustainable development goals and the Paris climate change agreement.

According to the Climate Bonds Initiative, a record $41.8 billion worth of so-called green bonds were issued across the world last year, an increase of 14 per cent on 2014 and a massive jump compared to the 2012 figure of just $2.6 billion.

So what is a green bond?

Green bonds were initially pioneered by the World Bank and refer to debt issued with the aim of funding environmentally-friendly initiatives. These include a wide variety of projects from clean energy or low-carbon infrastructure projects like water treatment and wind and solar farms, through to the development of under-utilised brownfield sites, which are under developed and often contain low levels of industrial pollution.

To put it simply, green bonds are short-hand for green building and sustainable design projects. Their aim is to encourage sustainability and their tax-exempt status makes them more attractive than a traditional bond.

Principles of Green Bonds:
  • Use of Proceeds: Green project categories should provide clear environmentally sustainable benefits, which, where feasible, will be quantified by the issuer
  • Process for Project Evaluation and Selection: The issuer should outline the decision-making process it follows to determine the eligibility of projects using green bond proceeds
  • Management of Proceeds: Bond proceeds should be appropriately tracked by the issuer using a formal process
  • Reporting: Issuers should provide, at least annually, a list of projects that bond proceeds have been allocated towards, including a description of the projects, the amounts disbursed and the expected environmentally sustainable impact (as confidentiality and/or competitive considerations allow)
To qualify for green bond status, the development must take the form of any of the following:
  1. At least three quarters of the building needs to be registered for LEED (leadership in energy and environmental design) certification
  2. The development project must be receiving at least $5 million from the municipality or State
  3. The building must be at least one million square feet, or 20 acres in size

Green bonds are no longer the niche product they once were, with many large banks, including Indian bank IDBI, Dutch bank ING, Societe Generale and HSBC, now offering them to investors. As their popularity increases, regulation may become an issue.

In January 2014, a group of banks launched the Green Bond Principles aimed at standardizing practices for issuers and investors and improving transparency. The principles specify sectors in which green bond proceeds can be invested, including in renewable energy, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, clean transportation, and clean water.

The voluntary principles, developed with the support of the investor group Ceres and in consultation with investors and issuers such as the World Bank and IFC, already have the support of 55 of the largest investors, bond issuers and intermediaries, including Bank of America Merrill Lynch, Citibank, Credit Agricole, JP Morgan Chase, Goldman Sachs, HSBC and SEB. The aim is to provide issuers guidance on the key components involved in launching a credible green bond, to aid investors by ensuring availability of information necessary to evaluate the environmental impact of their green bond investments, and to assist underwriters by moving the market towards standard disclosures which will facilitate transactions. The International Capital Markets Association (ICMA) serves as the secretariat for the Green Bond Principles.

Going forward it remains to be seen how the market develops, with new entrants into the sector such as India and China pledging large amounts of investment. According to one commentator, by issuing green bonds you are explicitly telling everyone you want to channel your capital allocation towards low carbon or green activities, both of which are becoming increasingly respected investments in the financial community. For some, it is a chance to show they care about our planet’s future and thus play a greater part in providing finance, and receiving finance, for future projects.

 

Examples of green bond-supported projects:

Indonesia: a geothermal project supported by World Bank green bonds is designed to increase access to affordable, clean energy and also reduce 1.1 million tons of greenhouse gases every year.

China: monies raised from green bonds is helping to reduce costs through improved energy efficiency in factories and is expected to cut greenhouse gas emissions by 4 million tons a year.

Mexico: International Finance Corporation (IFC) green bonds are supporting a new large-scale solar power facility in Mexico that doesn’t require subsidies and will meet the energy needs of 164,000 people while creating jobs and reducing dependency on polluting diesel generators.

India: IFC green bonds are helping a company recycle e-waste from computers, discarded mobile phones and other electronics that can be harmful to the environment and to peoples’ health.

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