Development Pathways for Green
Bonds: A Comparative Study
Melissa Low & Jacqueline Tao
40th International Association of Energy Economics (IAEE) International Conference
Singapore
18-21 June 2017
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Outline
• 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
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Motivation: Green Finance on the international Agenda
Achieve sustainable development – economic, social and
environmental:
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•
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•
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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
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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”
(Source: UN, UNFCCC, OECD)
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The Financial Gap
• 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 lowcarbon economy.
(Source: IEA, New Climate Economy, CBI, HSBC)
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What are Green Bonds?
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)
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Green Bonds Market Overview
• Volume in 2016 was US$81 billion, equivalent to approximately US$9.2m
raised every hour
(Source: Climate Bonds Initiative, IFC)
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Green Bonds Market Overview
(Source: Climate Bonds Initiative, IFC)
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Seven Types of Green Bonds
1.
2.
3.
4.
5.
6.
7.
Corporate Bond: “Use of proceed” bond issued by corporate entity
Project Bond: Bond backed by single or multiple project, investor has
direct risk exposure of project
Asset-based security (ABS): Bond collaterised by one or more specific
projects
Supranational, sub-sovereign and agency (SSA) bond: Bonds issued by
international financial institutions (IFIs) e.g. World Bank, European
Investment Bank
Municipal bond: Bonds issued by municipal government
Sovereign bond: Bonds issued by national government. Dec 2016: Poland
issued first, followed by France in Jan 2017
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)
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China’s Green Bonds Market Actors
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).
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India’s Green Bonds Market Actors
Main Actors
State Institutions
Reserve Bank of India (RBI), Ministry of Finance, Securities
Exchange Board of India (SEBI), Insurance Regulatory and
Development Authority (IREDA), and Pension Fund Regulatory,
Development Authority (PFRDA), Indian Railway Finance,
National Clean Environment Fund, and Ministry of
New & 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)
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Key Milestones in China & India’s Green Bond Markets
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 20
years 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 $350 million
in green bonds for renewable energy
projects
2016
- Shanghai Pudong Devt Bank Co. raised CNY 20
bil in first domestic green bond
- Industrial Bank of China launched first green
credit ABS in line with PBoC Guidelines
- CCDC and CECEP launch China Green Bond
Index/Selected Index, Shanghai & Shenzhen
Stock Exchanges set up guidelines
-IREDA issued tax-free GB
-Hero Future Energies issued
nonconvertible debentures certified by CBS
for wind project
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Examples – Shanghai Pudong Development Bank
• 35 new Chinese issuers entered the market in 2016
▫ Two largest issuers – Shanghai Pudong Development Bank and Industrial Bank made
up approximately 43% of all Chinese issuance between them.
▫ These two were also the largest green bond issuers globally in 2016.
• In 2016, first tranche of green bonds worth RMB 20 billion issued in January.
Third tranche of green bonds issued in July worth RMB 15 billion with a 5 year
term and coupon rate of 3.4%
• According to the Climate Bonds Initiative’s analysis, of the 3 bonds issued by
the bank (RMB 50 billion) in 2016, there was 100% alignment with
international definitions.
(Source: COWI, European Commission)
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Examples – ReNew Power Ventures Pvt. Ltd
• ReNew Power Ventures Pvt. Ltd is an
independent power producer (IPP) in India
• In November 2016, the company announced a
public issue of NCDs with a face value of
Rs.10, 00, 000 each aggregating Rs.500 Crore.
the issue raised 5 billion rupees (US$ 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
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Comparing China & India’s Green Bond Markets
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, NDRC
Guidance, Green Bond Endorsed
Project Catalogue
Climate Bonds Standard,
Sustainalytics
Identified
bestpractice
public
sector
measures
Preferential risk weighting
Exemption from loan-deposit ratio
Fast-track approval
Tax incentives
Develop rupee denominated GBs
Tax-free bonds
Allow insurance and pension funds to
invest in GB
Regulatory 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
onwards
Lowering forex hedging costs
(Source: COWI, European Commission, CBI, HSBC)
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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) hydropower
electricity 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)
(Source: CBI)
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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
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Discussion: The Future of Green Bonds
• 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.
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Thank you!
Questions?
You may also email me further
questions at [email protected]
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International Alignment of Green Bonds
• 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:
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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)
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Review & Assurance in the Green Bond Market
• 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:
▫
▫
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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)
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Second Opinions by CICERO
• 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
(Source: CICERO/ENSO)
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(Source: CBI)