The EBRD’s approach to the green bond market

By Isabelle  Laurent


How the EBRD is helping shape a young market to foster greener investment

The EBRD has played a key role in shaping investment through the green bond market. Isabelle Laurent describes its work on attracting socially responsible investors from the private sector to environmentally friendly finance.

Even before the inception of the green bond market in 2007-08, the EBRD had been in active dialogue with investors seeking bonds that contribute to the pursuit of social and environmental goals.

Indeed, as long ago as 2002, the EBRD's Environmental and Sustainability Department (ESD) and Treasury had noted an increasing demand from “socially responsible” investors (SRI) for information on the EBRD’s corporate governance standards, as well as social and environmental standards.

The emphasis was as much on the EBRD’s internal application as on our projects, with questions on the water and energy consumption and recycling activities in all our offices, as well as on the breadth and depth of our Human Resources policies, necessitating the robust engagement of a number of different departments.

Green bond issuance, in the early stages of the market, was dominated by multilateral development banks (MDBs). It focused on climate finance, with a commitment to segregate and monitor the proceeds of a given green bond, which would be disbursed to new, eligible green projects, with undisbursed monies being placed on deposit.

Working with ESD, we in Treasury sought to define broader general criteria for projects that could be supported by such issuance to include projects focused on water management, waste management and sustainable transport as well as renewable energy and energy efficiency, where at least 90 per cent of the funding is directed towards the green outcome.

Noting that much of the green bond issuance was relatively short-dated, whereas our relevant projects tended to be longer with delays in disbursements, Treasury sought to persuade investors that the proceeds of an EBRD green bond could be used to refinance existing projects as well as new ones.

This also assuaged the concerns of the then Vice-President, Banking, Varel Freeman, that green bond issuance by the EBRD might set too high a volume level for Banking to achieve.

We launched our inaugural green bond in 2010, with the assessment methodology, and the form and medium for information to be disseminated to investors agreed with ESD as well as key SRI market players; with the criteria for establishing and monitoring eligible projects established by Operational Strategy and Planning; and with strong estimated volumes of eligible green loans from the Energy Efficiency and Climate Change (E2C2) team.

The bond went under the title Environmental Sustainability Bond, because the World Bank was said to have “patented” the name green bond in Japan, where the first bond was placed to both retail and institutional investors. Our first green bond was a somewhat modest AU$ 25 million four-year bond. It nonetheless launched our programme, which has now seen us raise €1.64 billion through 57 bond issues in eight different currencies.

While it would be true to say that we can fund these projects without recourse to the green bond market, and that there is currently no pricing benefit for such issuance, there have been two distinct advantages for us in issuing green bonds.

 Doing so has broadened and diversified our investor base, and it has allowed us to highlight our SRI credentials to investors, which encourages some to buy our normal bonds as well. There are also risks and downsides, especially reputational concerns if we are deemed to flout our high social and environmental standards, as well as the additional work involved in criteria selection, monitoring and reporting.

Given the EBRD’s overall and very public commitment to sustainability, we believe the reputational issues exist with or without our green bonds, and many of the monitoring and reporting demands are required by other constituencies as well as investors in our ordinary issuance. We are nevertheless grateful to all those who contribute to the SRI reporting requirements.

As to the future, we are eagerly anticipating the fruits of the EBRD’s Green Economy Transition approach.