HKU Summer institute 2019

green corporate strategy

Topic Eight
Green Bond

Summer 2019
Hong Kong, China
 Agenda
§ Introduction
§ What are Bonds?
§ What are Green Bonds?
§ Why issue Green Bonds?
§ Green Bond Principles
§ Assurance/Verification
§ Green Bonds (2007 –2013)
§ New Era of Green Bonds
§ Green Bonds in China and Hong Kong
 Accounting Perspective

Owners or Lenders or
Shareholders Creditors
Financing
Activities Equity Capital Debt Capital
(Paid-in Capital) (Liabilities or Debt)
Principal
Dividends
& interest
Cash

Collection
Purchases
üMaterials
Firm üPP&E
Operating
üHuman assets
Activities
Sale
Investing
Produce
Activities
goods &
services
PP&E = Property, Plant & Equipme
 The Bond Indenture
u Contract between the company and the
bondholders that includes:
• The basic terms of the bonds
u Maturity; Coupon; etc.

• The total amount of bonds issued

• A description of property used as security, if
applicable
• Sinking fund provisions
• Call provisions
• Details of protective covenants
 Bond Classifications
u Registered vs. Bearer Forms
u Security
• Collateral – secured by financial securities
• Mortgage – secured by real property, normally land
or buildings
• Debentures – unsecured
• Notes – unsecured debt with original maturity less
than 10 years
u Seniority – preference in position over other lenders
• In the event of default, holders of subordinated
debt must give preference other specified creditors
who are paid first.
 Required Yields

u The coupon rate depends on the risk

characteristics of the bond when issued.
u Which bonds will have the higher coupon, all
else equal?
• Secured debt versus a debenture
• A bond with a sinking fund versus one without
• A callable bond versus a non-callable bond
 Other Bond Types

u Income bonds
u Convertible bonds

u There are many other types of provisions

that can be added to a bond, and many

bonds have several provisions – it is
important to recognize how these
provisions affect required returns.
 Securitized Bonds

u Also called asset-backed bonds

u Bondholders receive interest and principal

payments from a specific asset rather than

a specific company or government
u Mortgage backed securities are the best-

known type of securitized bond, but others

include
• Car loans
• Credit cards
 What are Green Bonds?

Green finance market is evolving quickly in global market

• The first "labelled" green bond was issued in 2007.
• Began with multilateral agencies, European Development
Bank.
• First corporate (non-bank) bond issued in November 2013.
• Next wave was commercial banks.
• The year 2016 has shown how far the market has
developed, with annual issuance aligned with international
definitions reaching a record USD81bn, equivalent to
approximately USD9.2m raised every hour! (Climate Bond
Initiative)
 What are Green Bonds?
Climate bonds (also known as green bonds) are fixed-income
financial instruments (bonds) linked in some way to climate
change solutions.

Green bonds enable capital-raising and investment for new

and existing projects with environmental benefits.

Currently four types:

1.Green Use of Proceeds Bond.
2.Green Use of Proceeds Revenue Bond.
3.Green Project Bond.
4.Green Securitized Bond.
 What are Green Bonds?

A. Green Use of Proceeds Bond:

• A standard recourse-to-the-issuer debt obligation.
• Proceeds moved to a sub-portfolio or otherwise
tracked by the issuer.
• Use of proceeds attested to by a formal internal
process that will be linked to the issuer’s lending and
investment operations for projects.
 What are Green Bonds?
B) Green Use of Proceeds Revenue Bond: a non-recourse-to-the-issuer
debt obligation in which the credit exposure in the bond is to the pledged
cash flows of the revenue streams, fees, taxes, etc., and the Use of
Proceeds of the bond goes to related or unrelated Green Project(s).
These proceeds shall be moved to a sub-portfolio or otherwise tracked by
the issuer and attested to by a formal internal process that will be linked to
the issuer’s lending and investment operations for projects.

C) Green Project Bond: a project bond for a single or multiple Green

Project(s) for which the investor has direct exposure to the risk of the
project(s) with or without potential recourse to the issuer.

D) Green Securitized Bond: a bond collateralized by one or more

specific projects, including but not limited to covered bonds, ABS, and
other structures. The first source of repayment is generally the cash flows
of the assets.
 What are Green Bonds?
• Proceeds are exclusively used to finance approved
environmental projects.
• Not general corporate purposes.
• Issuers of green bonds usually maintain this transparency
through formal monitoring and verification by auditors and,
where sustainability/greening is promised, environmental
specialists.
• Monitoring can be conducted by the issuer of a bond, and/
or a third-party.
• Assurance/verification steps. Transparency to confirm
funds are being used appropriately and that the supported
projects are yielding the intended environmental benefits.
 Why Issue Green Bonds?

A) Enhance Environmental Brand by being “green:

• For example, GDF Suez (now called Engie) - "Is that
it is equally a tool to complement our strategy, which
includes being the leader for Europe in the energy
transition, and will be done through this type of
projects."
 Why Issue Green Bonds?

B) Attract New Investors

• To attract new and young investors. In long term this will
lower prices - either by bigger demand or same amount
for lower price.
• "We noticed clearly that there is more and more appetite
for this type of transaction, so we are diversifying our
investor base."
• Vasakronan – Diversify borrowings "which over time,
will result in lower borrowing costs".
 Why Issue Green Bonds?
C) Pricing
Looking for longer term pricing advantage in green market
from broader investor base.

D) Other Reasons
•Green bonds can fit into existing investor portfolios due to
their similarity to existing bonds.
•Green attributes – slight competitive advantage most
investors will choose.
•Driving management improvement, a green "rating",
operating efficiencies
•Reducing contingent liabilities.
•Risk management for management and investors.
 Green Bond Principles
The Green Bond Principles (GBP) are voluntary process
guidelines that recommend transparency and disclosure
and promote integrity in the development of the Green
Bond market by clarifying the approach for issuance of a
Green Bond.

The GBP have four components:

1. Use of Proceeds.
2. Process for Project Evaluation and Selection.
3. Management of Proceeds.
4. Reporting.
 Green Bond Principles
• The issuer of a Green Bond should outline the investment decision-
making process it follows to determine the eligibility of an individual
investment using Green Bond proceeds.
• Where applicable, the issuer should, as a first step, review the
investments overall environmental profile.
• In all cases, the issuer should establish a well-defined process for
determining how the investments fit within the eligible Green Project
categories identified in the Use of Proceeds disclosure.
• If possible, issuer should work to establish impact objectives from the
projects selected.
• The net proceeds of Green Bonds should be moved to a sub-portfolio
or otherwise tracked by the issuer and attested to by a formal internal
process that will be linked to the issuer's lending and investment
operations for projects.
• Depending on issuer's and investors' expectations, outside review of
the internal tracking method may or may not be necessary.
 Voluntary Process Guidelines
The GBP recognize several broad categories of potential eligible Green
Projects for the Use of Proceeds including but not limited to:
•Renewable energy.
•Energy efficiency (including efficient buildings).
•Sustainable waste management.
•Sustainable land use (including sustainable forestry and agriculture).
•Biodiversity conservation.
•Clean transportation.
•Clean water and/or drinking water.

There is diversity of opinion on the definition of Green Projects; therefore

it is not the intent of the GBP to opine on the eligible Green Project
categories. The GBP recommend issuers communicate their Use of
Proceeds categories clearly so that investors can determine the bond's
consistency with their investment strategy.
 Reporting
• In addition to reporting on the Use of Proceeds and the
eligible investments for unallocated proceeds, issuers
should report at least annually, if not semi-annually, via
newsletters, website updates or filed financial reports on
the specific investments made from the Green Bond
proceeds, detailing wherever possible the specific project
and the dollars invested in the project.
• The GBP recommend the use of quantitative and/or
qualitative performance indicators which measure, where
feasible, the impact of the specific investments (e,g,
reductions in greenhouse gas emissions, number of
people provided with access to clean power or clean water,
or avoided vehicle miles travelled).
 Reporting
• Attention will be paid to the accuracy and integrity of
sustainability information and data whose disclosure is
recommended by the GBP and which will be reported by
issuers to stakeholders and used for strategic decision
making by investors.
 Voluntary Process Guidelines
There are also several levels of independent assurance that can be
provided to the market. Such guidance and assurance might include, in
order of increasing rigor:
(i) Second party consultation: for example, an issuer ("first party") can
hire an expert consultant ("second party") with climate expertise to
help in the establishment of a Green Bond's eligible Green Project
categories. The issuer may choose to keep the recommendations of
the consultant private.
(ii) Publicly available reviews and audits: if an expert consultant or
auditor and an issuer so choose, a consultant's recommendations or
an auditor's evaluation may be put in the public domain by the issuer.
(iii) Third party, independent verification/certification: at the moment,
at least one or more standards intended for use by accredited third
parties to certify Green Bonds are in development. The GBP are
supportive of certification of Green Bonds against fully developed and
vetted standards. It is also the intention of the GB to allow for third
party evaluation/audit of conformance with the guidelines
recommended herein.
 Verification/Assurance
• Recently the market has become less focused on the third-party
approach and more on bespoke second-party opinions, which can go
beyond "green" and into sustainability more broadly.
• The publication of the GBPs has helped provide a more robust
assurance environment by defining a set of guidelines for issuers and
investors which, while not being a standard, nonetheless provide
guidance for giving an "opinion".
• The second-party opinion is especially important to socially
responsible investors:
• When the bond issuer is not a large well-known institution with transparent
environmental, social and governance credentials;
• When the activities being financed are not obviously "green" and, hence, require
additional scrutiny and performance indicators; and
• When the issuer is pureplay "green" but is issuing a corporate bond and investors
would like to know that their funds are deployed in projects and not for general
corporate purposes.
• Not always significant assurance requirements.
 Verification/Assurance
To answer the following questions:
1) Are they really green? Or issuer can do it itself?
2) Initial verification of the bond issue – confirm that assets or
projects meet criteria established for use of proceeds.
3) Tracing use of proceeds – ensure a process is in place.
4) Annual verification – reporting to ensure that the projects
comply with criteria.

Other standards. e.g. LEED (“Leadership in Energy and

Environmental Design”) , and others?
 Climate Bond Standard
Climate Bond Initiative – A Certification Scheme
The Climate Bonds Initiative ("CBI") is an investor-focused not-for-profit
organization, promoting large-scale investments that will deliver a global
low-carbon economy.
The Certification Scheme allows investors, governments and other
stakeholders to prioritize "low carbon" investments with confidence that
the funds are being used to deliver a low-carbon economy.
Certification is available for assets and projects that meet the
requirements of the Climate Bonds Standard. In order to receive the
“Climate Bond Certified” stamp of approval, a prospective issuer of a
Green or Climate Bond must appoint an approved 3rd party verifier
 Climate Bond Standard
Those 3rd party verifier, who will provide a verification statement that the
bond meets the Climate Bond Standard.

See the link:

https://www.climatebonds.net/standards/assurance/approved-verifiers
 Credit Rating Agencies
Green Bonds Assessment methodology based on five key
factors:
(i) organization, (ii) use of proceeds, (iii) disclosure on the
use of proceeds, (iv) management of proceeds, and (v)
ongoing reporting and disclosure on environmental projects
financed or refinanced with such securities.

Moody’s ratings: From GB1 (Excellent) to GB5 (Poor).

 Market for Green Bonds
(2007 – October 2013)
Issuing Institution # of Issues Amounts (US$, millions)
World Bank 46 $3,844
European Investment Bank 12 $3,479
International Finance Corp. 8 $2,001
Kommunalbanken AS 8 $175
African Development Bank 7 $838
European Bank for Reconstruction
& Development 7 $376
Asian Development Bank 6 $794
Nordic Investment Bank 4 $412
Export-Import Bank of Korea 1 $500
 Market for Green Bonds
(2007 – October 2013)

• These bonds are primarily issued in major currencies by

international financing institutions.
• The majority of issuers put auditing and monitoring
structures in place to ensure proceeds were ring-fenced.
• Critical in analyzing what market requires for
verification/assurance.
• New "corporate" deals involve less of both.
• Labeled green bonds by multi-lateral institutions tended to
have terms in the 3 – 6 year range.
• Newer corporate deals tend to have longer terms.
 New Era of Green Bonds
• Climate Bond Initiative estimates $346 billion of climate
themed bonds outstanding (to October 31, 2013).
• Proceeds must align with their criteria for a low carbon,
climate-resilient economy, but not specifically labeled as
green bonds.
• Bonds not required to be monitored, funds to be ring-
fenced, or bonds to be tied to the financing of certain
projects.
• Globally – 25% increase in issuances from 2011 to 2012
 New Era of Green Bonds

• Overall value of green bonds issued in 2013 by corporates

and public banks was $11.4 billion.
• Value of corporate green bonds expected to grow to $20
billion in 2014 ($2.1 billion in 2013).
• CBI recently increased its estimate for green bonds issues
in 2014 from $20 billion to $40 billion.
• 2014 Q1 - $8.997 billion.
• Corporate issues - $4.03 billion.
• Development banks - $4.9 billion.
 New Era of Green Bonds

• 70% of these explicitly or implicitly backed by

government.
• Largest markets geographically – China, India, UK,
France.
• Largest market sectors – low carbon transport, energy,
climate finance.
• Others – buildings and industry, waste and pollution
control, agriculture and forestry.

Not necessarily low risk!!!!

 Green Bonds since 2013
Electricite de France (November 2013).
Vasakronan AB (November 2013).
Unibail-Rodamco SE (February 2014).
Vasakronan AB (March 2014).
Svenska Cellulosa AB (March 2014).
Unilever (March 2014).
Toyota (March 2014).
Skanska (April 2014).
Iberdrola (April 2014).
GDF Suez (May 2014).
Regency Centers, L.P. (May 2014).
Vornado Realty L.P. (June 2014).
 Green Bond in China/HK

• China has rapidly emerged as the leading issuer of

green bonds (Financial Times, May 4, 2017)
• China issued $36bn of green bonds in 2016, almost 40
per cent of the $81bn of green bonds issued globally.
• In line with the PRC Government’s green initiative.
• Need private market money to meet the fund demands
• Still reporting and transparency issues!
 Green Bond in China/HK

u Major Chinese banks and corporates

 Conclusion
Having attended this seminar, you should be able to
understand the followings:-
•Bond and green bond concepts
•The 4 types of green bonds;
•Reasons for issuing green bonds;
•Components of the Green Bond Principles;
•Review, verification and certification processes
•The recent development of green bonds, particularly in
Hong Kong and China.