What we’ve learnt from 10 years in the green bonds market

By Dan Storey

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Green bonds lessons

EBRD experts on what potential green bond issuers need to be aware of

What are international investors looking for from emerging market green bonds?

Charles Smith, Senior Funding Officer, Treasury: Most green bond investors take a holistic view, assessing a bond as a whole to ensure that not only do the proceeds go to robust green assets but also that the issuer’s environmental strategy and governance follow sound Environmental Social and Governance (ESG) principles.  Environmental progress cannot come at the expense of social or other issues.  Investors typically understand the need to see green projects in their local or regional context but will still invariably question whether the level of green ambition is high enough.

Do green bonds provide cheaper funding?

Charles Smith: There is some evidence of green bonds enjoying price advantages over conventional bonds, particularly in the secondary market, but it is not conclusive for every issuer.  Ultimately, pricing depends on investor demand.  An issuer with a smaller pool of investors that reaches more investors through a credible green bond will have a greater chance of achieving better pricing than an issuer that provides a poorly structured green bond as a nice-to-have to its existing investors.  For a potential issuer reaching out to new investors, the best source to understand the market is talking to a reputable green bond underwriter.

What assets can be included in a green bond, and how do issuing banks select them?

Carel Cronenberg, Associate Director, Energy Efficiency and Climate Change: Issuers can include any assets that provide clear environmental benefits that go beyond business-as-usual in their particular sector.  Some assets, such as renewable energy, are relatively straightforward to include.  Others linked to, for example, fossil fuels are more complicated and require more evidence and commitment from the issuer to demonstrate that they use best practice technologies and mark a transition away from a reliance on fossil fuel heavy activities. The EU Taxonomy and related EU Green Bond Standard provide very useful additional guidance on how to do this credibly.

Dana Kupova, Associate Director, Green Economic Transition Coordinator: Equally important as selecting eligible assets is establishing a process for tracking them.  The EBRD provides technical assistance to its clients to strengthen their internal processes for assessing environmental benefits and risks, which lays the groundwork for the client to be able to develop a robust Green Bond Framework and to get ready for the post-issuance reporting.  This last element should not be underestimated.  A survey of European investors showed that 55% would definitely sell if post-issuance reporting was poor, and 30% would be more likely to.

How do you manage the proceeds?

Charles Smith: The basis for a green bond is that the issuer uses its proceeds to fund a predefined set of green activities so, regardless of whether a bond finances new assets or refinances existing assets, the issuer must always be transparent about where the money goes.  Even if a green project has not yet started or has already matured, the funds cannot be used for general corporate purposes.  This means that issuers need to plan carefully how to park excess liquidity temporarily if, for instance, the predefined green projects have not yet drawn down the funds.

What is a second party opinion?

Carel Cronenberg:  Second opinions or third party verifications are an external third party review of a green bond and most investors want the additional reassurance one brings, especially in emerging markets.  They can take a number of forms.  Some simply confirm that the issuer has the capacity, resources and processes that it claims to have and that their issuance broadly tallies with market expectations for a GBP-aligned bond.  Others may assess whether an issuer’s process and assets adhere to a set standard.

Dana Kupova:  By far the most common form of third party review in EBRD economies are second party opinions confirming alignment with the GBP.  We have also seen a number of cases where issuers decided to acquire additional certification, for instance, through the Climate Bonds Standard.

The GBP guidelines for external reviews provide good advice on what to consider when choosing the type of external review as well as the provider.  Investors tend to prefer providers they are familiar with so an issuer should consider this when deciding whether to go for an internationally recognised company or a lesser-known provider from a local market. 

What do investors expect in terms of reporting and to what level of detail?  Is impact reporting per project category sufficient or does it need to go project by project?

Charles Smith: Reporting is a crucial feature of green bonds and market expectations in this area have risen significantly in recent years.  While reporting on the use of proceeds of a Green Bond is a core requirement of the GBP, investors have increased their focus on the impact of the underlying projects.  Prior to an issuance, the issuer would need to think about how to report and how the metrics compare and align with, for instance, national and international decarbonisation targets and initiatives.

Carel Cronenberg:  The GBP recommends that issuers state the qualitative and quantitative benefits of the green assets, such as the expected CO2 savings.  They also ask issuers to report at least annually on use-of-proceeds until full allocation.  Some issuers report on a portfolio basis, others report on a project level perhaps because they are less constrained by confidentiality issues or have fewer projects.  The ICMA’s GBP Guidance Handbook provides guidance and the Harmonized Framework for Impact Reporting has also helped issuers and investors to reach a common understanding on how to report.  It includes metrics that issuers can adopt or adapt.

Do green bonds need to align with taxonomies of eligible projects taken from the Green Bond Principles, the EU Green Bond Standard, or another standard? And how do they fit together?

Carel Cronenberg:  The GBP provide high-level guidance on the process of structuring green bonds while specific standards complement them by providing more details on eligible projects.  The EU Green Bond Standard, for instance, provides additional guidance to green bond issuers as to what may be considered green and eligible by investors in sectors of the economy like heavy industry that are moving towards zero emissions.  The hope is that it will also encourage issuers from a broader range of sectors to come to the market.

Dana Kupova: It is not mandatory to issue to a recognised standard but many investors prefer or require it.  The key is to ensure your green bond framework aligns with a standard that your targeted investors recognise. Asking them what expectations they have early on in the process will help you to decide whether you want to follow a standard and, if so, which one.  The EBRD can share expertise on the most recent trends and discussions in this area.

Will the green bond markets soon be regulated?

Charles Smith:  The green bond markets and the GBP are largely unregulated, relying on all market participants to maintain the integrity of the market.  This includes investors, issuers, underwriters, external review providers, listing authorities and index providers. 

However, regulatory authorities are increasing their focus on environmental and sustainable investments, for instance, by integrating standards for selecting projects and assets, issuance, and reporting in the EU Green Bond Standard or setting green bond prospectus requirements.

In short, green bond markets are still evolving and the EBRD, being active as both an issuer and investor, can help our clients to navigate them.

What requirements does the EBRD have for investing in a green bond?

Georgiana Ghenu, Senior Banker: We invest with the purpose of encouraging new green bond issuance in different countries and sectors and helping clients new to these markets to build the internal systems and governance that will enable them to issue.  The EBRD can act as a key investor and can support issuers to mobilise broader investor interest in their green bond issuances.

We expect full alignment with the GBP and believe it is in an issuer’s own interest.  Many investors only invest if a green bond follows the GBP and, even if a bond attracts investment, an issuer may suffer reputational damage if their bond is not well aligned.

The EBRD has three additional requirements beyond the GBP. Firstly, we require an external review of a green bond framework before issuance.  Secondly, we cannot invest in any green bond that includes assets that are on our exclusion list.  Thirdly, the use-of-proceeds must be exclusively for activities in our countries of operation.

Is your organisation based in an EBRD economy and considering issuing a green bond?

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