The first green bond from Mexico issued by Nacional Financiera (Nafin), certified by Climate Bonds!! Check out our blog for full details!!
We see municipalities and development banks quickly catching up on green bond issuance over the past week or so! For three key issuances covered in this blog, we as usual share our thoughts on the green credentials of these bonds and further dive into the eligible projects under use of proceeds.
Municipal green bonds
State of Hawaii issued its 2nd green bond to preserve land and habitats ($35m, 2.0-3.5%, AA/AA/Aa2, 3-10 yrs)
Another green bond issued by Hawaii State! The issuance comes in a total of $35m and 18 tranches, offering interest rates between 2.0% and 3.5%. Rated as AA (S&P’s), AA (Fitch) and Aa2 (Moody’s), the bond is underwritten by the Bank of America Merrill Lynch and will mature in 3 to 10 years.
The use of proceeds will be used to purchase and preserve land in Kahuku Koolauloa, Oahu, including the exclusive right (also known as “conservation easement”) to keep the land solely for conservation purposes. The acquisition of the land is expected to preserve natural habitat, coastal and inland ecosystems, recreational, research and educational values, and open space. All proceeds will be spent on acquisition shortly after issuance while no further tracking and reporting on use of proceeds is expected from the state.
Although the proceeds will be fully allocated upon closure of the bond, it will be good to know more about the climate impacts of the land acquisition to increase transparency and reinstate the green credential of such investment. This bond mainly aims for environment conservation and resilience. As discussed in our Climate Bond Standard on Agriculture, Forestry and Other Land Use, issuers are encouraged to follow best practice and scientific literature to report relevant performance metrics when net carbon reduction may not be applicable.
Great to see diverse use of proceeds in municipal green bonds!
Corporate
First ever-Japanese corporate issuance! Sumitomo Mitsui Banking Corp (SMBC) issues a $500m green bond for a range of renewable energy, energy efficiency in shipping and resource productivity. (more on what this actually means below!) (4.15%, A1 / A / A, 5 yrs)
SMBC issues its inaugural green bond and got itself the title of first corporate green bond issuer in Japan. With total issuance of $500m, the bond offers 4.15% interest rate at 5 yrs of maturity, rated as A1 (Moody’s), A (S&P’s) and A1 (Bloomberg). Bank of America Merrill Lynch and SMBC are joint bookrunners for this issuance. SMBC commits to annually report on allocation of proceeds, and potentially the environmental impacts of invested projects.
The proceeds will be used to finance eligible green projects on renewable energy, energy efficiency and resource productivity (i.e. recycling). Some criteria are quite specific, for example small run-of-river hydro under 25MW and LEED / BREEAM / CASBEE standards for new building constructions.
Another interesting find on the list is ships or vessels with energy efficient design such as IMO Energy Efficiency Design Index and Ship Energy Efficiency Management Plan. Energy efficient shipping is supported by our Climate Bond Taxonomy as eligible use of proceeds for green bonds but we’ve yet to bring together a working group. In the meantime, it’s encouraging to established standards used to measure project eligibility!
Development Bank
KfW issues its 3rd green bond this year! And it's another big one! €1.5bn, 0.125%, AAAe/Aaae, 5-yrs
The German development bank KfW issues its third green bond this year under the ongoing “Green Bonds - Made by KfW” program. Originally offered at EUR 1bn, the bond received 2.4 times oversubscriptions, which the final settlement sets at EUR 1.5bn. Rated as AAAe (Fitch) and Aaae (Moody’s), the bond offers an annual coupon of 0.125% and matures in 5 years. Credit Agricole CIB, HSBC and SEB are the joint book runners for this issuance. The use of proceeds will be used for renewable energy projects such as solar PV or jointly with energy grid management projects, on-shore wind, hydro, and biogas.
Two reasons for Canadian excitement: EIB first Candian dollar (CAD) denominated Climate Awareness Bond (CAB)! (CAD 500m, 1.25%, AAAu, 5-yr) demonstrates demand for C$ green bonds as the pro-green bond Liberal party gains a majority in federal elections and plans to catalyse the Canadian green bond market.
The European Investment Bank (EIB) issues its first CAD-denominated green bond at a total of CAD 500m. This 5-yr bond offers a coupon of 1.25% and is rated as AAAu by DBRS. Bank of Montreal, Scotiabank, and TD Bank are the joint lead managers for this issuance.
This is the first time a supranational has issued a green bond denominated in Canadian dollars – and it’s clearly a success with a full order book within a few hours. The bond was well received by Canadian investors who account for 53% of the green bond and demonstrating to domestic Canadian issuers that there is plenty of appetite for C$ green bonds.
Another reason to get excited all over again, about the Canadian green bond market is the recent political shift with the Liberal party winning a majority government in the federal election last month. The winning manifesto was soaked in great policies to catalyse the growth of the Canadian green bond market. Highlights include the launch of a ‘Canada Green Investment Bond’ to support large and community scale renewable energy projects and plans to establish a C$2bn Low Carbon Economy Trust to finance low carbon projects.
With a whole new attitude to the COP21 discussions and such great green bond focused manifesto, we are a whole lot more optimistic about Canada’s green bond potential than ever before. Add this issuance from EIB demonstrating the huge demand in Canada and around the world for C$ green bonds – now that’s what we call momentum!
Unlabelled climate-aligned project bond
The third reason for Canadian excitement this is an unlabelled climate-aligned project bond from Ontario! Dufferin Wind Power issues CAD 200m unlabelled project green bond ($153m, 4.317%, BBB, 8 yr) for wind power project
A subsidiary of the China Longyuan Power Group, Dufferin Wind Power, issued a C$200m project bond backed by a 91MW wind farm in Dufferin County, Ontario. The bond will mature in 8 years with the coupon of 4.317% and rating of BBB by DBRS. Citi and Scotia are the joint lead managers for this issuance.
Again, Canada is ripe to see big growth in green and climate-aligned bonds in 2016! Look out for the Canada State of the Market supplement to be launched in a couple weeks in conjunction with Sustainable Prosperity.
Sustainability bonds (thematic bonds)
In this part of the blog we want to highlight why we are not including the following two sustainability bonds as green bond in our data BUT we also want to welcome and highlight these great thematic bonds to the market! Our aim in this blog is to give clarity on where we draw lines in the sand for our green bond data when it comes to these types of Sustainability bonds.
Development Bank of Japan (DBJ) issued €300m sustainability bond for green buildings and loans based on (non-green) CSR criteria
The state-owned DBJ issues a sustainability bond of €300m, maturing in 4 years with a fixed coupon of 0.375%. This A1 (Moody's) and A (S&P) rated bond is jointly underwritten by Bank of America Merrill Lynch, Goldman Sachs, JP Morgan and Morgan Stanley. Some of the proceeds will go to the Green Building Certificates (similar to the sole use of proceeds of DBJ’s inaugural green bond EUR 250m issued in Oct 2014).
The majority of the proceeds will be used for DBJ's Environmentally Rated Loan Program (ERLP), which provides loans for green companies based on their ESG performance. The smaller Green Buildings part of the bond we are happy to see is leveraging existing standards and we’d consider them as green. Check out our blog on the green credentials of DBJ’s inaugural green bond (issued only for green buildings) for more details.
The larger sized loan program is a more complex area. Now there are plenty of green bonds backed by green loans and even similar bonds that give loans partially based on ESG or CSR criteria (such as Credit Agricole CIB’s green bond program).
In these other cases we can establish that the proceeds are either;
1) Invested downstream – allocated to green projects by any sectors; or
2) Invested upstream – allocated to climate-friendly companies.
Both downstream and upstream allocation of green loans should adopt certain selection criteria for eligible recipients. For downstream, the eligibility of green projects need to show clear climate benefits, as defined in our Climate Bonds Taxonomy. For upstream, green companies should be selected from climate-friendly sectors (i.e. pure-play business - that generates over 95% revenues from assets that fit within the Climate Bonds Taxonomy).
This is significant because if the loans made to companies are based on their green pre-play status rather than the loans being dedicated for certain green projects, it is important to establish that the business nature of the selected recipients is truly green.
And importantly for both, there must be adequate reporting and disclosure to investors about where the proceeds have been used.
This Sustainability bond focuses on CSR rather than just green.
DBJ’s loan program within this bond falls outside the key criteria for a green bond. DBJ do not use green pure-play businesses as criteria for loans, instead they use their own CSR criteria. This means that companies will good CSR (as determined by DBJ’s framework) are eligible for loans. The program is most similar to the second example above where loans are allocated upstream to green business, as DBJ provides loans upstream to companies and not to specific projects.
However, DBJ’s CSR criteria are not aligned with the definition of a green pure-play for two reasons: 1) Although DBJ has a sector exclusion list, which is not publically disclosed, there is no certainty whether only climate-friendly sectors will be eligible for loans; 2) Environmental performance has a bigger influence on the loan decision, but it is not the only driver for recipient selection, and there is no minimum requirement on environmental performance. So any company, with excellent scores in other non-environmental pillars such as general management, could potentially compensate their relatively low environmental performance and still be eligible.
Clearly, the aim of DBJ’s Sustainability bond is to finance its green buildings and promote best practice in CSR across those companies it lends to. A worthy ambition! Although we wouldn’t call it a green bond it very much earns its sustainability title, especially as the ERLP it offers has clear incentives for companies to improve CSR performance.
DBJ’s sustainability bond is a great example of a thematic bond pushing the envelope by improving ESG of companies, but we for the reasons outlined above, we wouldn’t label it a ‘Green Bond.’
BNG’s second sustainability bond provides loans to municipalities based on previous ESG (non-green) performance
Similar to DBJ, the latest thematic bond from Dutch lender BNG is s sustainability bond and not strictly a green bond. It’s the second time BNG issues a sustainability bond following the success of its inaugural issuance last year. Sustainalytic’s provided a review on the ESG framework of the bond.
Let’s look at this bond in the same way as the DBJ issuance above. The proceeds are allocated by BNG ‘upstream’ to the entity who can then choose to use the loan proceeds as they wish. These entities for the BNG example are municipalities. The loans can used to finance type of project within the municipality – so potentially loans could be going to green – but we don’t have the transparency to know that for sure as there is no requirement on the recipient of the loan to report back on the use of loan proceeds.
The aim of the bond isn’t to finance green but instead to reward and enhance the ESG performance of municipalities. Similar to DBJ, this is a fantastic ambition!
Green Bonds Gossip:
Vermont Educational and Health Buildings Financing Agency plans to issue a total of $18.5m of green bond to finance for the Saint Michael’s College Project. The bond will be issued on Nov 10 in 21 tranches. We will cover more details on the green credentials later!
City of Paris to issue €300m green bond, perfect timing as the city prepares to host the COP21! Eligible projects are renewable energy, building energy efficiency, low-carbon transport and climate adaptation. More details upon issuance!
Ecotricity issues its 3rd ecobond, aiming to raise as much as £25m with 5-year maturity and a 5.5% coupon. Proceeds will be used to build six new wind and solar projects and continue supporting its business operation. Although this is not listed as green bond, it’s great to see climate bonds helping to finance pure-play business. The bond will be closing at the end of it Nov.
As revealed in the Green Bond Conference in London Stock Exchange last month, Barclays is considering about its own green bond issuance around New Year! The issuance would further extend the bank’s ongoing involvement in green bond market having already announced treasury will build a EUR1bn green bond portfolio and is in the second year of its green bond index (which it runs in partnership with MSCI).
