Green bonds - ICMA Quarterly Report 9 January 2014
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Green bonds - ICMA Quarterly Report 9 January 2014

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Green bonds - by Nicholas Pfaff ...

Green bonds - by Nicholas Pfaff

In 2008, the World Bank launched its Strategic Framework for Development and Climate Change to help stimulate and
coordinate public and private sector activity in this area. In 2008, as a practical outcome of this strategy the World Bank issued a SEK2.7 billion bond thereby launching the GB market. The World Bank has subsequently continued actively to support this innovation and remains the largest issuer in the market with more than $4 billion raised as of August 2013. Other key multilateral institutions such as the European Investment Bank, the International Finance Corporation, the European Bank for Reconstruction and Development, and most recently the African Development Bank have followed suit contributing to an outstanding pool of GBs from multilaterals estimated in mid-2013 at $7.4 billion.

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Green bonds - ICMA Quarterly Report 9 January 2014 Green bonds - ICMA Quarterly Report 9 January 2014 Document Transcript

  • 33 Primary Markets Issue 32 | First Quarter 2014 www.icmagroup.org Green bonds by Nicholas Pfaff ICMA aims to play an active role in providing advice and support to ongoing efforts to underpin the growth of the Green Bond (GB) market by ensuring continuing good practice. A GB is generally defined as one where the issuer declares the proceeds will be used for the reduction of CO2 emissions and/or environmental sustainability purposes. In 2008, the World Bank launched its Strategic Framework for Development and Climate Change to help stimulate and coordinate public and private sector activity in this area. In 2008, as a practical outcome of this strategy the World Bank issued a SEK2.7 billion bond thereby launching the GB market. The World Bank has subsequently continued actively to support this innovation and remains the largest issuer in the market with more than $4 billion raised as of August 2013. Other key multilateral institutions such as the European Investment Bank, the International Finance Corporation, the European Bank for Reconstruction and Development, and most recently the African Development Bank have followed suit contributing to an outstanding pool of GBs from multilaterals estimated in mid-2013 at $7.4 billion. As the market has developed, investors focused on understanding the underlying environmental projects and their impact have been able to seek guidance from third parties providing certification, evaluation and rating services (amongst others CICERO, the Climate Bonds Initiative, Sustainalytics and Vigeo). Other types of issuers have also joined the GB market in the wake of the multilaterals. They are, for example, regional and local authorities such as Région Ile de France and the Commonwealth of Massachusetts. More recently, banks (Bank of America Merrill Lynch) and corporations (Vasakronan, EDF) have also entered the market. EDF’s GB at €1.4 billion is the largest from these new issuers and is exclusively dedicated to financing future renewable energy projects led by EDF Energies Nouvelles, a wholly-owned subsidiary. These developments illustrate the growing diversity of issuers beyond multilaterals and their core investor base for GBs. It also creates new challenges. Indeed, GB issuers typically make a number of representations to investors with respect amongst others to use of proceeds and reporting. In the case of multilaterals, such representations and resulting obligations are backed up by the modus operandi, budget, legal set-up and public sector ownership of these institutions. For private sector banks and corporates, GB issues involve specific undertakings over time that need to be clearly understood by all parties involved in the transaction. As a result, there has been a perception from a number of key GB issuers and intermediaries that the market’s growth requires further guidance on good practice and standardisation. In this respect, the World Bank has been active in bringing together issuers, intermediaries and investors to discuss these topics and possible guidelines. Similarly a group of major underwriters, the Green Bond Steering Committee (GBSC), have been working on a market initiative the Framework for Green Bonds that was originally published in a Euroweek supplement last October. The Framework aims to “maintain the integrity” of the GB market for the benefit of issuers and investors alike, and to bring together generally all parties involved in the market. It is a set of voluntary guidelines that will allow market participants to “communicate about the characteristics of any given Green Bond”. It addresses key points such as definitions of different categories of Green Bond, as well as use and management of proceeds, certification and reporting. ICMA is involved in these discussions both directly and through its relevant committees. It wishes to contribute as much as possible to standardisation and good market practice in the GB market, and aims to support the institutionalisation of ongoing initiatives in this direction. Contact: Nicholas Pfaff nicholas.pfaff@icmagroup.org