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Development Pathways for Green Bonds: A Comparative Study
Melissa Low & Jacqueline Tao40th International Association of Energy Economics (IAEE) International Conference
Singapore18-21 June 2017
Outline
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• Motivation
• Descriptive Analysis ▫ What are Green Bonds? How have they evolved?
• Comparative Study of Green Bond Markets in India & China▫ Main actors, projects, finance & climate policies
• Discussion▫ Developmental Pathways for Green Bonds
Motivation: Green Finance on the international Agenda
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(Source: UN, UNFCCC, OECD)
Achieve sustainable development – economic, social and environmental:• Goal 6: Clean Water and Sanitation• Goal 7: Affordable and Clean Energy for All• Goal 9: Resilient Infrastructure and Sustainable Industrialization• Goal 11: Sustainable Cities and Communities• Goal 13: Climate Action
Combat climate change and accelerate and intensify the actions and investments needed for a sustainable low carbon future• China’s Intended Nationally Determined Contribution (INDC) is to
reduce carbon intensity by 60-65% below 2005 levels by 2030• India’s INDC is to reduce emission intensity by 33-35% by 2030
compared to 2005 levels, achieve40 percent cumulative electric power installed capacity from non-fossil fuel based energy resources by 2030
Scale up green financing• G20 Green Finance Study Group’s “Greening the Bond Market”
The Financial Gap
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• According to the IEA, cumulative investment of $53 trillion is required by 2035 in the energy sector alone
• The New Climate Economy estimates that $93 trillion is required across the whole economy by 2030.
• To put this in context, the global bond market currently stands at $90 trillion, making the bond market an essential tool to finance the transition to a low-carbon economy.
(Source: IEA, New Climate Economy, CBI, HSBC)
What are Green Bonds?
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Green bonds are refinancing products/debt instruments whose proceeds are invested in green or climate change solution assets and activities, allowing equity investors and banks to free up capital from existing assets and recycle into projects.
Tenure typically range from 18 months to 30 years. Currently, 49% of issued green bonds issued for 1 to 5 year tenures, 30% for 5 to 10 years and 21% for more than 10 years.
Issuers may be governments, intergovernmental organizations, regional development banks, financial institutions, corporations. Market dominated by public sector (44%).
Investors are wide ranging, availability of a variety of ‘use of proceeds’ of bonds is attracting corporate investors.
Second party assurances, audits and third-party certifications help ensure and verify proper use of proceeds in the absence of market-wide standardization.
(Source: OECD, CICERO, CBI)
Green Bonds Market Overview
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• Volume in 2016 was US$81 billion, equivalent to approximately US$9.2m raised every hour
(Source: Climate Bonds Initiative, IFC)
Green Bonds Market Overview
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(Source: Climate Bonds Initiative, IFC)
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Seven Types of Green Bonds
1. Corporate Bond: “Use of proceed” bond issued by corporate entity
2. Project Bond: Bond backed by single or multiple project, investor has direct risk exposure of project
3. Asset-based security (ABS): Bond collaterised by one or more specific projects
4. Supranational, sub-sovereign and agency (SSA) bond: Bonds issued by international financial institutions (IFIs) e.g. World Bank, European Investment Bank
5. Municipal bond: Bonds issued by municipal government
6. Sovereign bond: Bonds issued by national government. Dec 2016: Poland issued first, followed by France in Jan 2017
7. Financial sector bond: Corporate bond issued by a financial institution to raise capital to finance “on-balance sheet lending”
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China’s Green Bond Market
• Green Bond investments raised CNY 255 billion (US$36.9 billion) in 2016.
• Key sectors include large infrastructural projects e.g. transport & rail projects and renewable energy projects.
• Standards & Guidelines follow localized definition of green to the market, with a focus on pollution prevention and ecological protection.
• Challenges ahead include harmonizing domestic guidelines with international standards, enhancing credit ratings of potential issuers. There might also be a need to overcome difficulty of foreign investors to buying into China’s green bond market.
(Source: Climate Bonds Initiative and China Central Depository and Clearing Company (CCDC))
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(Source: CBI’s China Green Bond Market 2016 report)
China’s Green Bonds Market Actors
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Main Actors
State Institutions China’s State Council, Ministry of Finance, People’s Bank of China (Central Bank), National Development and Reform Commission (NDRC), China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC)
Rating Agencies China Chenxin International Credit Rating, China Lianhe Credit Rating, Dagong International Credit Rating (all supervised by PBoC), oncoming: Noah Holdings Ltd
Investors Commercial banks (64%) , mutual funds (11%), insurance companies (9%)
Banks Shanghai Pudong Development Bank Co., China Industrial Bank, Agricultural Bank of China, Bank of Qingdao
Utilities China Datang Renewable Power Co., CLP Holdings, Yalong River Hydropower Development Co., Guodian Technology and Environment Group Corporation, Chaowei Power
(Source: COWI, European Commission, CBI, Carbon Pulse)
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India’s Green Bond Market
• Green Bond Investments raised R79 billion (US$1.2 billion) in 2015, showing growing momentum in its debut year.
• Key Sectors include renewable energy projects (>60%), low carbon transport assets such as rail.
• Standards & Guidelines come in the form of green bond requirements published by the Securities and Exchange Board of India in January 2016. Certification still done by external parties Climate Bond Standard (with verification from KPMG and Emergent Ventures India) , Sustainalytics.
• Challenges ahead include diversifying funding sources and improving capital market access, credit enhancement, reducing forex-hedging costs, certification and standardization (India-specific).
India’s Green Bonds Market Actors
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Main Actors
State Institutions Reserve Bank of India (RBI), Ministry of Finance, SecuritiesExchange Board of India (SEBI), Insurance Regulatory andDevelopment Authority (IREDA), and Pension Fund Regulatory, Development Authority (PFRDA), Indian Railway Finance, National Clean Environment Fund, and Ministry ofNew & Renewable Energy
Rating Agencies Securities and Exchange Board of India (SEBI)
Investors International Finance Corporation (IFC)
Banks Axis Bank, Yes Bank, ICICI Bank, Export-Import (Exim) Bank, IDBI Bank,
Utilities NTPC, ReNew Power Ventures, Hero Future Energies, CLP India (Wind Farms),
Commercial sector Greenko Group
(Source: COWI, European Commission)
Key Milestones in China & India’s Green Bond Markets
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Year China India
2013 -Green Credit Guidelines (CBRC) -IREDA launched loans for RE
2014 - First Panda Bond (Daimler)- Municipalities allowed to issue bonds- Guangdong issues municipal bond (pilot)
-IREDA launched first green bonds with AAA credit rating, interest 8.16% for 10 years, 8.55% for 15 years and 20years respectively.
2015 - Green Bond Policy Proposal (Green Finance Task Force - PBoC/UNEP)-Green Bond Guidelines, Catalogue (PBoC)- Xinjiang Goldwind S&T Co, CLP Holdings, Agricultural BoC issues green bonds
-Yes Bank, Exim India, CLP India issues green bonds-State-owned IDBI Bank issues $350 millionin green bonds for renewable energy projects
2016 - Shanghai Pudong Devt Bank Co. raised CNY 20 bil in first domestic green bond- Industrial Bank of China launched first green credit ABS in line with PBoC Guidelines- CCDC and CECEP launch China Green Bond Index/Selected Index, Shanghai & Shenzhen Stock Exchanges set up guidelines
-IREDA issued tax-free GB-Hero Future Energies issued nonconvertible debentures certified by CBS for wind project
Examples – Shanghai Pudong Development Bank
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• 35 new Chinese issuers entered the market in 2016
▫ Two largest issuers – Shanghai Pudong Development Bank and Industrial Bank made up approximately 43% of all Chinese issuance between them.
▫ These two were also the largest green bond issuers globally in 2016.
• In 2016, first tranche of green bonds worth RMB 20 billion issued in January. Third tranche of green bonds issued in July worth RMB 15 billion with a 5 year term and coupon rate of 3.4%
• According to the Climate Bonds Initiative’s analysis, of the 3 bonds issued by the bank (RMB 50 billion) in 2016, there was 100% alignment with international definitions.
(Source: COWI, European Commission)
Examples – ReNew Power Ventures Pvt. Ltd
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• ReNew Power Ventures Pvt. Ltd is an independent power producer (IPP) in India
• In November 2016, the company announced a public issue of NCDs with a face value of Rs.10, 00, 000 each aggregating Rs.500 Crore. the issue raised 5 billion rupees (US$ 73.8 million) in green bonds to refinance debt, which bears about 11% interest from Kotak Mahindra Bank Ltd.
• In February 2017, ReNew Power raised another US$475 million to refinance existing long term debt investment in masala bonds issued by ReNew Power’s subsidiaries for solar and wind power projects.
(Source: ReNew Power Ventures)
Village Bijeypur, Distt. Sheopur, Madhya Pradesh
Distt. Rajkot, Gujarat
Comparing China & India’s Green Bond Markets
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Country China India
Actors State financial institutions, commercial banks, utilities
State financial institutions, commercial banks, utilities
Sectors Transport and rail, renewables Renewables, green transport (rail)
Use of Standards
PBoC’s Green Bond Guidelines, NDRCGuidance, Green Bond Endorsed Project Catalogue
Climate Bonds Standard, Sustainalytics
Identifiedbest-practice public sector measures
Preferential risk weightingExemption from loan-deposit ratio Fast-track approvalTax incentives
Develop rupee denominated GBsTax-free bondsAllow insurance and pension funds to invest in GBRegulatory framework, defining project categories, scope of disclosure requirements
Challenges Non-conformity with int’l standards,Potential green bond issuers do not have investment-grade credit ratings
Credit enhancement from BBB- to AA onwardsLowering forex hedging costs
(Source: COWI, European Commission, CBI, HSBC)
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(Source: CBI)
Definitions of Green (PBoC, NDRC):
• Retrofits to fossil fuel power stations
• “Clean” coal
• Electricity grid transmission
• Infrastructure that carries fossil fuel as well as renewable energy
• Large (>50MW) hydropowerelectricity generation (currently under review by the Hydropower Technical Working Group under the Climate Bonds Standard, which is developing criteria for climate-friendly investment in hydropower)
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Key Similarities and Differences
• State financial institutions leading the way
• Large infrastructure (rail) and renewable energy projects funded in both markets
▫ Green bonds is a viable way of tapping private sector funding to achieve climate pledges
• China uses domestic guidelines while India’s issuers have largely chosen to be certified by external parties like Climate Bonds Standard
▫ Instrumental in ensuring international investor confidence in the green credentials of the Indian green bond market
• Challenge of credit enhancements present in both markets, but India faces additional issue of forex hedging costs due to issuances in foreign denominations and presence of international investors
Discussion: The Future of Green Bonds
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• Closing the financial gap
▫ Green bond market has continued to mature, increase in quantity and quality of issuances. But market needs to grow, at speed.
▫ HSBC’s preliminary estimate for 2017 ranges up to US$120bn, Moody’s is around US$ 200bn, Climate Bonds Initiative at US$150bn.
• Harmonisation of the market builds investor confidence, secures scalability
▫ Policy developments are underway
• Realised environmental impact of financed projects
▫ EXIM Bank (India) has noted the expectations of international investors concerning data and disclosure i.e. “the investor letter”
▫ Worldwide, ex post assessments currently voluntary
• Growth markets
▫ For China and India, growth prospects are boundless
▫ But need to pay attention to issuers from lower rating bands coming to market.
International Alignment of Green Bonds
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• 13 January 2014: Consortium of major banks developed a set of voluntary guidelines called the Green Bonds Principles to:
▫ Develop a common approach;
▫ Promote integrity; and
▫ Provide recommendation on transparency and disclosure for the Green Bond market
• Five pillars:
▫ Definition – Use of proceeds
▫ Selection – Process for project evaluation
▫ Traceability – Management of proceeds
▫ Transparency – Monitoring and reporting
▫ Verification – Assurance through external review
(Source: Green Bond Principles)
Review & Assurance in the Green Bond Market
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• Proper use of proceeds difficult to verify in the absence of market-wide standardization… but best practice is emerging for certain project types e.g. renewable energy projects
• Issuers’ engagement with investors (roadshows, meetings, etc.)
• Independent assurance providers conduct:
▫ Second opinions (at time of issuance)
▫ Second-party reviews and consultation
▫ Audits
▫ Third-party certifications
• These involve verifying the environmental integrity and impact of green bonds, and process by which such bonds are issued, managed and reported on.
(Source: OECD, Green Bond Principles, CBI/HSBC)
Second Opinions by CICERO
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(Source: CICERO/ENSO)
• CICERO Second Opinions are graded dark green, medium green or light green.
• Reports are around 10-12 pages
• Issuers of green bonds can expect first draft within 2 weeks, and final Second Opinion within 3 to 5 weeks, depending on the responsiveness of the issuer and the completeness of the documentation
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(Source: CBI)
