Transparency and standards were at the top of the agenda this week with Ceres INCR (a Climate Bonds Standard Board member) issuing a statement outlining investor expectations of green bonds, supported by 26 large investors.
The statement is timely when looking at the latest crop of green bonds out of the US this week. Iowa has jumped on the green labelling train by issuing a green municipal bond to fund its water and waste-waster projects. Though, like almost all green municipal bonds for water, there was no second opinion making it difficult for investors to determine its green credentials. OPIC also had no second opinion on their latest green offering that uses proceeds to fund a large hydropower plant in Chile. Again, asking investors to make calls on these projects is tough! Fortunately, this wasn’t a problem for investors in the inaugural green bond from DNB as DNV GL provided a second opinion on the wind projects backing the bond (so it looks like Norway is still ahead in terms of green bond best practice!).
Another interesting bond out this week is a £190m ($286m) climate, or unlabelled, bond from Macquarie European Infrastructure Fund (MEIF) for biomass projects. This shows potential of climate investments beyond the current green bonds universe.
Finally, Fannie Mae announced it is to provide discounted finance for green multi-family properties giving rise to hopes of credible green mortgage backed securities.
Norway’s DNB issues a NOK 1bn ($131.6m) inaugural green bond, 5yr tenor, floating coupon NIBOR+52bps, A1e
DNB, a large Norwegian commercial bank, issued a NOK 1bn ($131.6m) inaugural green bond this week. The 5 year green bond has floating coupon linked to NIBOR (NIBOR+52bps). Moody’s has rated the bond A1e. DNB Markets was the manager for the deal.
According to DNB, the bond was well received in the market with Storebrand, Nordea Asset Management and DNB Asset Management all taking part in the deal.
DNB is the first Nordic commercial bank to issue a green bond. Similar to the Australian NAB certified climate bond that was issued in December 2014, the bank used its green loan book to back the bond. Specifically, they backed the bnd with a mixture of construction and operation loans to 14 wind projects across Ireland, England and Sweden.
DNV GL provided the second opinion on the green credentials of the bond. Because DNB got a second opinion the bond is eligible, and will be listed, on the Oslo Stock Exchange green bond list.
Now, one of the reasons DNB chose to issue a green bond is to highlight its work in financing renewable energy. Although it has close links to oil industry, DNB has historically also provided finance to the hydroelectric industry in Norway. Indeed, DNB now lends to a range of renewable energy projects including solar in Latin America, the US and Italy.
OPIC issues a third green guarantee; $4.85m, 8-year tenor, floating coupon (est. 0.11%)
OPIC latest green guarantee is a $4.85m issue with 8 year tenor and floating coupon linked to quarterly t-bill. The green guarantee is the same structure as for previous issuance (see our earlier blog for more details) from OPIC. Proceeds from this issuance will be used for Alto Maipo hydroelectric power plant, which is a large 531MW run-of-river hydro near Santiago, Chile.
OPIC has issued guarantees on this specific hydro project before, but this is the first time it has labelled one as green. Large hydro can be controversial - so much so that the MSCI Barclays green bond index excludes certain types of large tropical hydro projects. CBI's industry working group for water are currently developing standards for hydropower - look out for them in the coming months.
Iowa Finance Authority issues green bonds for water projects – US$321.5m, 1-25yr tenors, 1-5% coupon, rated Aaa
Following last week’s Indiana Finance Authority bond, there is yet another green municipal bond for water projects out this week; this time from the Iowa Finance Authority. The $321.5m green bond Is issued across 13 different tranches with a tenors ranging from 1-25 years and coupons from 1%-5%. Moody’s rated the bond Aaa. The lead manager for the deal is JP Morgan.
Proceeds from the green bond will go towards the upgrade or construction of drinking water and wastewater infrastructure. Projects include upgrades to wastewater treatment plants, storm water infrastructure and sewer infrastructure, as well as construction of a new water treatment plant with LEED-certified buildings (no information on the level of LEED will be achieved; generally we look for LEED silver as a minimum, but really it should be Gold or above to have emissions reduction impact.) .
Similar to other US green municipal bonds, no second opinion is provided – making it difficult for investors to evaluate the green credentials of the water projects.
Climate (un-labelled) bonds: MEIF issue a £190m ($286m) climate bond for biomass projects, 6.750%, 5yr, Ba2/BB
Macquarie European Infrastructure Fund (MEIF) Renewable Energy UK has issued a £190m ($286m) climate (unlabelled) bond. Proceeds will go to two biomass project companies in the United Kingdom. The notes have a coupon of 6.750% and 5-year tenor. Moody’s rated the bond as Ba2 and Fitch rated it BB.
These notes were issued to simplify two project financings, bringing Energy Power Resources and CLP Envirogas together. The firms operate 5 biomass-fired plants and 68-landfill gas generating engines over 25 sites in the UK – the largest being in Thetford, Norfolk and Ely, Cambridgeshire, with 38.5MW and 38MW of capacity respectively.
According to IJGlobal the deal was oversubscribed with “wide group of institutional investors throughout Europe” participating..
Market developments
Fannie Mae making green loans cheaper for borrowers for multi-residential buildings
Fannie Mae, a leading provider of mortgage credit in the US, will provide lower interest rate loans (lower by 10 basis points, or 1/10th of a 1 percent) to green multi-residential buildings according to the US Building Council. Fantastic news given that Fannie Mae and its Lenders financed $28.9 Billion in Multifamily Loans in 2014. Why does this matter for green bonds? A large portfolio of green loans will allow Fannie Mae to use these loans to back a future green bond issuance, in the form of a corporate bond or asset-backed securities. This is the model Norway’s KBN used: first, establishing a substantial green loan book by lending to municipalities for green projects at a discount; then using the green loans to back a green bond issuance (for more details on KBN’s most recent bond check out last week’s blog). Exciting stuff!
Investors call for standards and definitions
The Ceres Investor Network on Climate Risk (INCR), has released a statement of investor expectations specifically for the green bond market. It flags up four key areas where investors want more definition and structure:
1. Eligibility: general criteria for green projects
2. Initial disclosures and intended use of proceeds
3. Reporting on use of proceeds and project impacts/benefits
4. Independent assurance
Investors main ask is for greater transparency and reporting, especially quantitative reporting where possible, on the green credentials and impacts of green bonds: “this will minimise ‘greenwash’ concerns and reputation risk to issuers and investors”. Investors want to be satisfied beyond doubt that green bonds really are an environmentally sound investment.
The statement has 26 investor signatories including Allianz SE, AXA Investment Management, BlackRock Inc., California Public Employees' Retirement System (CalPERS), California State Teachers' Retirement System (CalSTRS), Mirova, PIMCO, Treasurer State of California and Zurich Insurance Group.
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Look out for more green bonds from US city Tacoma, the World Bank and Vasakronan in the next week!
