This week we’ve seen two sizeable corporate green bonds come to market: a US$600m bond from repeat issuer Bank of America and a first issuance of SEK2.5bn ($300m) from Swedish energy provider Fortum Varme. There has also been a smaller green municipal bond issuance ($32.9m) from San Francisco Public Utilities Commission.
There were quite a few market developments too: State Street launched a green bond index fund that tracks the Barclays/MSCI green bond index; the World Bank finally made the second opinion on their green bond framework public; SRI membership organisation Eurosif put green bonds on the agenda for EU policymakers as part of the Capital Markets Union. And, as always, we have some green bond gossip for you.
Corporate green bonds
Second green bond from Bank of America: slightly bigger this time at $600m; proceeds for renewable energy and energy efficiency (3yr, 1.95% coupon, A-)
Bank of America issued a USD600m green bond with 3 year tenor and 1.95% coupon, rated A- by S&P. Bank of America Merrill Lynch was the underwriter of the bond. This is Bank of America’s second green bond issuance, following their first green bond issuance in November 2013, which was one of the very first green corporate issuances in the market. Great to see them return to the green bond market as an issuer, as well as underwriter!
Proceeds of the bond will be allocated to renewable energy and energy efficiency projects, as defined under the bank’s 2013 commitment to lend, invest and facilitate $50bn of capital to low-carbon investments over a ten-year period. While we don’t have more details on the planned use of proceeds for this week’s green bond issuance, the use of proceeds of BoA’s 2013 $500m inaugural green bond, with a PwC attestation, is available. The report offers details on the different eligible projects and the allocation of proceeds for the 2013 bond, with the majority of the bond, $451.8m of the proceeds, financing wind and solar projects. Energy efficiency technology loans to lighting companies make up the remaining $46.7m.
Great work, Bank of America! We look forward to seeing next year’s attestation report for the new $600m green bond.
Largest SEK green bond deal to date from first time issuer Fortum Varme: SEK1bn (6yr, quarterly STIB+70bps) and SEK1.5bn (7yr, 1.75%), BBB+ with proceeds for renewable energy and energy efficiency
Fortum Varme Holding, a Swedish public-private energy provider, issued its first green bond, split across two tranches of SEK1bn (USD 120m) and SEK 1.5bn (USD 180m), making it the largest green bond deal in the Swedish market so far. Way to enter the market with a splash! Tenors for the bonds were 6 and 7 years, with coupons of quarterly STIB+70bps and fixed rate of 1.75% respectively. Fortum has a BBB+ rating from S&P. Underwriter was SEB.
Proceeds will go to renewable energy, energy efficiency and reduced environmental impacts. Happily,Fortum provides more granularity within each of these categories: renewable energy includes biogas from organic waste, wind, solar, wave; energy efficiency covers recovered energy, expansion of and management of district heating/cooling grid, new capacity for district cooling, demand side management, upgrading of production units and offices; reduced environmental impact encompass projects contributing to decreased emissions, waste management, recycling and re-use, flue gas and waste water management, biodiversity. Now, CICERO’s report makes it clear that some of projects in this latter broader environmental category will not have specific climate benefits, although be beneficial from a local environment point of view. But climate concerned investors can rest assured allocations to this category are limited to 20%. Good to see that level of disclosure. They also provide an excellent detailed overview of the selection process for projects – full points for transparency and disclosure! The bond will mainly finance new projects within these eligible categories, but some will also be allocated for refinancing.
It’s great to see that Fortum has a threshold for a minimum environmental impact of the investments made with the green bond: for renewable energy, investments have to achieve at least a total of 1000MWh per year of additional renewable energy. Similarly, for energy efficiency investments, at least 1000MWh of reduced primary energy use must be achieved. Although it would be good to know what this means in the context of Fortum’s overall energy production and use, it’s great to see issuers presenting tangible targets to investors.
CICERO provided a second opinion on the green bond framework, which is publically available, and Fortum has committed to annual reporting on a list of projects financed, a selection of project examples and a general summary of their green bond development. Nicely done, Fortum!
Municipal green bonds
Success for San Francisco Public Utilities Commission’s inaugural $32.9m green bond, getting both investor diversification & 40% oversubscription! (11-30yrs, 4-5%, A+)
San Francisco Public Utilities Commission (SFPUC) issued $32.9m of green municipal bonds for the city’s power projects. The green bond is actually a series of 13 tranches with maturities ranging from 11yrs to 30yrs and either a 4% or 5% coupon. S&P rated the series as A+. The lead underwriter for the deal was Wells Fargo.
The relatively modest bond size was met with huge demand from investors ending with a 40% oversubscription. Plus, SFPUC got investor diversification with orders from responsible investors that were new to SFPUC.
Proceeds will be used for renewable energy projects at the Hetch Hetchy area in California; in particular hydropower generation at Moccasin Powerhouse will be a project funded. There is no second opinion available, as with other US green municipal bonds, making it difficult to ascertain the green credentials of the bond.
Still, it’s great to see the investor demand and that California continues to be a leader in green bonds!
Green Bond Reporting
The focus of our blog so far has been commenting on the green credentials of new green bond issuances as they come to market, but as we all know, it’s also crucial to evaluate how the bonds are doing over time. This new part of the blog will provide updates on reporting; allocation of proceeds, use of auditor or third party verifier and the green credentials of the assets being financed relative to what the issuer stated at issuance.
Regency Centers: 2014 green corporate bond $250m, s/a coupon 3.75%, 10yr, BBB
This week, Regency Centers issued their first green bond report, disclosing that the funds have been allocated in full to LEED certified buildings, or buildings in the process of being certified - all in line with what they promised at issuance. PwC provides third party verification on the allocation of green bond proceeds. This is great to see, as independent auditing means investors don’t have to just trust issuers’ own claims on the use of proceeds. This gives investors confidence and transparency on what their money is funding.
The report also offers granularity on specific project names, locations, the certification rating (the majority is LEED silver) and the project costs incurred. Plus it provides a breakdown on the performance of each completed building project against the 6 different categories of LEED, including water and energy use improvements.
Overall, its great to see timely disclosure of use of proceeds and a breakdown of what the LEED certification means in terms of green credentials. There is room for improvement, as it would be good to see the energy use improvements in context – e.g. what percentage cuts in emissions are achieved - to make it easier for investors to know how the green credentials of their investment are aligned with a low-carbon future.
But overall, great work from Regency!
Vornado Realty: 2014 green corporate bond $450m, 2.5%, 5yr, BBB
Vornado Realty also published their first green bond reporting, as part of the company’s annual sustainability report. The report offers a breakdown of the use of proceeds for each of the 5 categories of eligible projects Vornado set out at issuance. Deloitte has provided third party verification on the use of proceeds. As we mention with Regency, it’s important that an independent party can back up claims on the allocation of proceeds; great to see best practice being followed here by Vornado Realty.
On to the green credentials, the vast majority of funds have gone to LEED buildings certified at various grades - new building developments, existing redevelopments, improvement projects and capital projects. A small amount has also been allocated to energy efficiency capital projects for non-LEED buildings. While the report discloses what grades of LEED certification are included for each category, they are mainly lumped together and there is no disclosure on the breakdown of performance within each LEED category, such as energy efficiency performance. Vornado could take a leaf out of Regency’s book on this. But, great start Vornado!
State Street Global Advisors launch green bond index fund linked to the Barclays MSCI green bond index
State Street Global Advisors launched a green bond index fund, for European investors, linked to the Barclays MSCI Green Bond Index. This means that the fund buys the composition of the index. The Barclays MSCI index uses Climate Bond Initiative green bonds data as its base and then adds another layer of green analysis to capture only those with a deeper shade of green. The development of another investible product is exciting because it means more investors can get exposure to green bonds.
World Bank FINALLY makes the second opinion on their green bond framework public – but not much new information for investors
The World Bank was a green bond pioneer in issuing the first green bond with a second opinion (from CICERO) back in 2008, but the details of the second opinion was only made publically available this month. While we’re thrilled to finally see the second opinion, we were surprised that it does not include any more granularity and new information for investors.
The World Bank is not the only large green bond issuer that has made their second opinion public lately: last month, Credit Agricole CIB released their second opinion (from Sustainalytics) on the green bond framework for their green bond private placement transactions. Great to have this increased transparency emerging in the market.
SRI membership organisation Eurosif puts green bonds high on the agenda for EU policymakers in their Sustainable Capital Markets Union manifesto
On the policy side, Eurosif, a non-for-profit pan-European sustainable and responsible investment (SRI) membership organisation, launched its Sustainable Capital Markets Union manifesto for European policymakers. Excitingly, the report included an extensive list of specific policy recommendations on how to build on larger green bond market as part of the EU’s Capital Markets Union efforts: support for the development of market standards (including a specific mention of the Climate Bond Standard); green bond issuance by cities, development banks and other public agencies; boost demand via mandates of public funds and central banks and by growing the Sustainable and Responsible Investment market and improving the risk return profile via guarantees and credit enhancements. Eurosif also highlighted the significant potential for aggregation, securitization and covered bonds to facilitate investment in smaller scale low-carbon assets. So, lots of options for EU's policymakers to join the green bonds party! The recommendations largely echo the calls from Aviva, asset manager and insurance provider, in December 2014 to place green bonds on the Capital Market Union agenda. Check out our report for the European Commission last month for more in-depth action plans for each of these green bond policy areas and Climate Bonds events on the topic - soon coming to a city near you.
HSBC report: “Green Bonds – More to Come” – green bonds kick starting a virtuous circle for climate investments and policy
HSBC released a report “Green Bonds – More to Come”, providing a comprehensive overview of the green bond market growth and drivers. The report highlights the positive role the green bond market can play in establishing a stronger trust base for the upcoming climate negotiations in November, as green bonds show that countries and market players are moving from talk to actual money flowing to climate investments. And of course – a strong deal in Paris would boost the green bond market even further. Conclusion: the green bond adventure is only getting started.
Green Bond Gossip
Dutch electricity transmission system operator TenneT has announced a green bonds programme. It will be the first Dutch (non-financial) corporate green bond. Proceeds will be used to finance linking offshore wind projects to onshore electrical grids. More details to come once the deal is closed.
We also hear on the grapevine that City of Asheville, North Carolina will be issuing a green water bond. We are hoping there will be a second opinion on the green credentials like utility DC Water got on their inaugural green bond.
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