Wkly blog: Digital Realty $500m GB for low carbon bldgs; SwedishExportCredit $500m inaugural GB; more OPIC GreenGuaranties; Latvenergo’s GB green credentials; EuroFIMA climate-aligned bonds; market dvlpts & gossip

It’s been a big couple of weeks with close to $2.5bn of green bonds issued. Digital Realty Trust came to market with a $500m green bond for low-carbon buildings, and Swedish Export Credit Agency became the first European export credit agency to join the green bond market with a $500m inaugural issuance.

We’ve also seen several asset-backed securities (ABS) this week — two unlabelled climate-aligned green bonds from Citi/Renewfund, and Sunrun, and a labelled green from Toyota that is an ABS but with proceeds going to low-carbon car loans rather than the underlying assets being green. Check out our separate ABS blog for a deep-dive into these issuances and the potential for securitisation of low-carbon assets.

Corporate green bonds

Digital Realty Trust issues US$500m green bond (3.95%, 7yr) for low-carbon buildings

Real Estate Investment Trust (REIT) Digital Realty Trust Inc. has issued its first green bond for US$500m to finance green buildings for data centres. The bond has 3.95% coupon and 7 year tenor. Bank of America Merrill Lynch, Citigroup, J.P. Morgan, RBC Capital Markets, and US Bankcorp are the deal underwriters.

The proceeds of the green bond will go to fund eligible green building projects. Instead of a second review from an independent party, Digital Realty has referenced existing green building standards, setting specific performance criteria that building projects must hit to be eligible. For example, buildings must have received, or be expected to obtain, LEED certification Silver, Gold or Platinum; BREEAM certification level Very Good, Excellent or Outstanding; BCA Green Mark rating Gold, GoldPlus or Platinum; Green Globes 3 or 4; CEEDA Silver or Gold or CASBEE B+, A or S.

Projects funded can be new or on-going building developments, renovations in existing buildings and tenant improvements. Any upgrade projects must improve energy or water efficiency by a minimum of 15% and be checked by an external party. Excellent that they have nominated a hurdle rate – something we should expect all green property bond issuers to do.

Digital Realty will report annually on their website covering the allocation of proceeds to eligible projects and status of green building certifications of the projects. An independent accountant will verify the company’s statement.

Next time we hope to see even more ambition with hurdle rates, and we'll be keen to see more detail about the (excellent) commitment to onsite renewables used. Also, some building standards cited are not as good as they could be — for example Singapore’s Green Mark Gold only represents the legislated minimum for a new development, with most new developments achieving well above the lowest nominated. We’re working on that to make it easier for issuers! But the great improvements around green property commitments in US market demonstrated by this bond outweigh such concerns for us.

Digital Realty have done a great job with their debut bond.

Latvenergo’s EUR75m green bond issued last week (1.9%, 7 yr, Baa2) will use proceeds for bioenergy, environmental preservation and sustainable environment

The first Latvian green bond from power utility Latvenergo was upsized from EUR 50m to EUR75m (US$84.8m), with a fixed annual coupon of 1.9%, 7-year tenor and rated Baa2 by Moody’s. The sole underwriter was SEB.

CICERO’s second opinion rated Latvenergo’s bond as “dark green”. Proceeds will be used for energy efficiency projects in the electric power grid and other projects (renewable energy, environment preservation, biodiversity and R&D for sustainable environment).

The renewable energy projects focus on bioenergy power plants. Experts tell us that using sustainable feedstock is crucial in bioenergy (see the Climate Bonds Standard for more details). Latvenergo is using only local Latvian wood, which is good to hear, although it would be good if investors were given certainty on whether the feedstock for Latvenergo’s bioenergy plants will be certified – from what we can tell only 50% of Latvia’s forests are certified under the Forest Stewardship Council.

Projects in the environmental preservation and sustainable environment category seek to minimise the environmental impacts of existing operations, such as hydropower and the electric grid infrastructure.  Safety and flood management improvements for hydropower, protecting fish migration around dams and monitoring electric power poles for white storks nests (a protected species) are all eligible projects.

R&D also falls into the sustainable environment bucket. Proceeds from green bonds are generally used for green assets rather than R&D into future projects; we are interested to see how the green outcomes will be reported next year. It’s worth noting that only up to 10% can go toward this project type.

Overall: great to see Latvia’s first green bond in the market!

Government Agency green bonds

Swedish Export Credit Corporation (SEK) issues its first green bond to the tune of US$500m. Entering the market with a splash! (5 yr, 1.875%)

The Swedish Export Credit Corporation (SEK) issued its first green bond; a US$500m green bond with a 5-year tenor and 1.875% coupon. Bank of America Merrill Lynch, Credit Agricole CIB, HSBC, and SEB are the joint bookrunners.

SEK is the first European export credit agency to enter the green bond market, although the Canadian, Korean and Indian export credit agencies have issued green bonds. In this case, SEK’s motivation for doing a green bond was to showcase their green investment and contribute to the development of the green bond market.

Its clearly been a success as SEK’s green bond was quickly oversubscribed, with high demand from Environmental Social and Governance (ESG) investors, who purchased 65% of the bond issuance. European investors picked up the majority of the bond (53%) followed by North America (33%). Central banks and asset managers were the main buyers, picking up 29% each.

CICERO provided a second opinion on the green bond framework, with eligible projects ranging across renewable energy, water and wastewater, energy efficiency, recycling, waste, sustainable construction, forestry, air quality, soil quality, sustainable materials and sustainable transport. Example projects are listed in each category giving a flavour of what’s being financed, though it stops short of eligibility criteria, which is a shame. For example, they disclose that green building standards LEED and BREEAM will be leveraged for green buildings, but don’t provide detail on what level of these rating schemes will qualify.

The good news is we can expect to gain this level of information in the annual reporting. SEK will do a portfolio-level CO2 impact assessment for their green bond issuance with the methodology transparently provided online.

Another solid green bond from Scandinavia, — nicely done SEK!

OPIC issues $40.4m of Green Guaranties for Chilean solar project (14 yr, 3.2 %)

US agency OPIC (Overseas Private Investment Corporation) issues a third round of Green Guaranties for the Luz del Norte solar farm in Chile. This latest issuance is for $40.4m with a tenor of 14 years and quarterly coupon of 3.2%. Bank of America Merrill Lynch was the sole underwriter in the deal.

For more details on OPIC’s Green Guaranties, check out our blog from last year.

Unlabelled climate bonds

European rail finance powerhouse Eurofima issue unlabelled climate-aligned kanga bond for A$35m ($27m)

We’ve covered “unlabelled” solar and wind bonds in the past; we will now start including other unlabelled bonds that are climate-related. This week’s example is the large rail finance entity Eurofima (a supranational: a financing agency backed by mutliple governments) issuing an A$35m 10-year bond with 3.9% coupon. It has a AA+ and Aa1 rating from S&P and Moodys respectively.

Rail infrastructure is a key part of low-carbon transport, since rail is far superior on emissions performance compared to road-based travel. According to our 2015 State of the Market report there are $418.bn of low-carbon transport bonds outstanding, mainly in the unlabelled climate-aligned bond universe. So plenty of opportunities around for investors.

Market developments

New platform for insurers to make voluntary commitments to UN frameworks launched by UNEP FI Principles for Sustainable Insurance (PSI) Initiative

The UNEP FI Principles for Sustainable Insurance (PSI) Initiative unveiled a platform for insurers to make voluntary commitments to UN frameworks, as well as a report detailing how to harness insurance for sustainable development.

Insurers with $14 trillion in assets under management partnered with the UN to strengthen the industry’s contribution to green. The report details numerous options to strengthen alignment between the insurance energy and sustainable development through to 2030.

Insurance matters for green bonds as it forms a key part of the investor base. Aviva with its Sustainable Capital Markets Union Manifesto has already been ahead of the game in looking at green bonds - here’s to getting insurance to be a bigger part of the low-carbon solution!

The Global Real Estate Sustainability Benchmark (GRESB) published Green Bond Guidelines for the Real Estate Sector

The Global Real Estate Sustainability Benchmark (GRESB) published Green Bond Guidelines for the Real Estate Sector. The guidelines leverage standards from existing green building certifications, and states that it’s aligned with the Green Bond Principles.

Good to see more moves in the market towards common guidelines and standardisation in the green bond market, and in the building sector in particular. The Climate Bonds Standard for Low Carbon Buildings was also released last month, and at the recent Environmental Finance conference in London a show of hands in the packed room indicated a clear preference in the market towards use of standards for green bonds.

London Stock Exchange to launch a green bond list

Following in the footsteps of Oslo Bors and Stockholm Nasdaq, London Stock Exchange (LSE) has announced it will also have a separate list for green bonds. This will make it easier for investors to buy and sell green bonds on the secondary market. As with previous lists, issuers are “required to provide the Exchange with a relevant second opinion document that certifies the nature of the bonds.”

With TfL’s £400m green bond issued in March there is more interest than ever in green bonds in the UK markets.

Our blogs are written by a team: Sean Kidney, Tess Olsen-Rong, Beate Sonerud, with help from Justine Leigh-Bell.