Green bonds: the need for an
international legal authority
Elli Kouriannidou
August 2017
Source: Climate Bonds Initiative
Author
Supervisor
Elli Kouriannidou
D.J.M. Veestraeten
E-mail: el.k_zis@yahoo.com
Student number: 11374918
Second reader
N.L. Leefmans
Programme
Statement of Originality
This document is written by Student Elli Kouriannidou who declares to take full
responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no
sources other than those mentioned in the text and its references have been used in
creating it.
The Faculty of Economics and Business is responsible solely for the supervision of
completion of the work, not for the contents.
Contents
1. Introduction……… 5
2. Green bonds and regulation: definitions and main information……….... 6
3. Case studies……….. 13
3.1 World Bank Group – IBRD……….. 13
3.1.1 Issuance information……… 14
3.1.2 Eligibility criteria and certification procedures……….. 15
3.1.3 CICERO Second Opinion……….... 16
3.2 European Union……….... 16
3.2.1 EIB – Climate Awareness Bond (CAB)……….. 17
3.2.1.1. CAB Issuance………... 17
3.2.1.2. Eligibility criteria and issuance related procedures…………... 18
3.2.2 EBRD – Environmental Sustainability Bond (ESB).……….... 19
3.2.2.1. ESB Issuance……….. 20
3.2.2.2. Eligibility criteria and issuance related procedures………….. 20
3.3 Netherlands……….. 21 3.3.1 BNP Paribas………. 26 3.3.2 Nederlandse Waterschapsbank N.V. (NWB)……….. 27 3.3.3 ING……… 28 3.3.4 ABN………... 28 3.3.5 Rabobank………. 30 3.3.6 Obvion hypotheken……….. 30 3.3.7 TenneT……….. 30 3.3.8 Alliander……… 31 3.3.9 FrieslandCampina. ……… 32
3.3.10 Entrepreneurial Development Bank (FMO)……… 32
3.3.11 Bank voor Nederlandse Gemeenten (BNG)……….. 34
3.4 China……… 35
3.4.1 Challenges and Regulatory Framework………. 35
3.4.2 Issuance……….. 38
4. Summary of the current situation and suggestions on regulation……….. 43
4.1 Current situation……… 43
4.2 Suggestions……… 49
5. Conclusion………... 54
6. Data Appendix ……… 55
List of Abbreviations
ABS: Asset-Backed Securities
BNG: Bank voor Nederlandse Gemeenten CAB: Climate Awareness Bond
CBI: Climate Bonds Initiative
CBRC: China Banking Regulatory Commission
CICERO: Center for International Climate and Environmental Research at the University of Oslo CIRC: China Insurance Regulatory Commission
CMU: Capital Markets Union
CPF: Country Partnership Framework CSR: Corporate Social Responsibility
CSTC: China Securities Regulatory Commission
EBRD: European Bank for Development and Reconstruction EIB: European Investment Bank
ESB: Environmental Sustainability Bond ESDS: Environmental and Social Data Sheets ESG: Environmental, Social and Governance EU: European Union
FMO: Entrepreneurial Development Bank FYP: Five Year Plan
GBP: Green Bond Principles GFSG: Green Finance Study Group GHG: GreenHouse Gas
GPP: Green Project Portfolio
IBRD: International Bank for Development and Reconstruction ICMA: International Capital Market Association
IFI: International Financial Institutions MDB: Multilateral Development Bank
NDRC: National Development & Reform Commission NPC: National People’s Congress
NWB: Nederlandse Waterschapsbank N.V.
OECD: Organisation for Economic Co-operation and Development PBoC: People’s Bank of China
RFSCs: Reference Framework for European Sustainable Cities SEB: Skandinaviska Enskilda Banken
SCD: Systematic Country Diagnostic
TFEU: Treaty on the Functioning of the European Union WB: World Bank
1. Introduction
Green bonds are a tool that assists achieving specific environmental targets, like those set by the Kyoto Protocol1 and the Paris Agreement2. Apart from the environmental benefits they also offer
economic advantages both to issuers and investors which will be further explained in the next chapter. This is the main reason why the market for green bonds experiences rapid growth in recent years. On the other hand there are costs and risks that raise uncertainty to market participants. One of the most vital issues is that there is not a commonly accepted and legally binding international framework for regulation. Even the definition of green is still vague and the voluntary attempts to provide guidelines by agents like NGOs are not enough to address the problem. Green bonds’ accelerating issuance together with the lack of consensus in regulatory issues may facilitate misuse via exploiting economic and reputational benefits related to green investments. Misleading behavior may arise in many forms; through investors’ misinformation or proceeds’ misallocation. Individual countries have different perspectives on such topics, whereas international forums like the G20 and institutions like the World Bank (WB) are currently investigating possible ways towards harmonization vis-à-vis green bonds’ regulation. The aim of this thesis is to analyze whether the creation of an international authority to regulate and supervise the market for green bonds is necessary.
In chapter 2, I will refer to the existing literature to clarify central definitions, green bonds’ benefits, their categories and principles, the market structure, size and characteristics, the main issuers and project types, the current regulation and its problems.
In chapter 3, I will present four main case studies on green bonds issuance, their use of proceeds and means of regulation. The first two case studies will concern the bonds issued by the WB and European Union (EU)'s institutions, namely the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD). The following two case studies will analyze the issuance in two individual countries; the Netherlands and China. The Netherlands was selected due to the wide variety of issuers and financed projects notwithstanding the country’s small size. China was included in this thesis mainly because of the differences in China's criteria regarding green bonds issuance and certification procedures3, but also because of the necessity of green investments in its economy when thinking of the large environmental damages4. The appropriate data to support these case studies will
be taken from the Organisation for Economic Co-operation and Development (OECD) Environment Statistics, the Climate Bonds Initiative (CBI) annual reports, the WB, the European institutions'
statistics, the G20 Green Finance Study Group (GFSG) and other relevant databases. The outcomes of
1 The Kyoto Protocol was adopted at the third Conference of the Parties to the UNFCCC in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005. Under the Protocol, 37 industrialized countries and the European Community have committed to reducing their emissions by an average of 5 percent against 1990 levels over the five-year period 2008-2012.
2 The Paris Agreement is the first-ever universal, legally binding global climate deal. It was adopted at the Paris climate conference (COP21) in December 2015, by 195 countries.
3 For more details see chapter 3 and: Climate Bonds and China Central Depository & Clearing Co. Ltd. (2016), “China Green Bond Market 2016”, annual report.
4 For more information see: https://www.economist.com/news/briefing/21583245-china-worlds-worst-polluter-largest-investor-green-energy-its-rise-will-have.
these case studies will enlighten the diversity among different regulatory systems regarding the allocation of proceeds, certification procedures and impact reporting. Based on these conclusions I will try to identify the occurrence of regulatory issues.
In the final two chapters of this thesis I will proceed to the assessment of the present situation and the conclusion remarks. According to this analysis results I will try to stress the necessity of
international regulation on green bonds and provide suggestions for this purpose. Finally, directions for future research will be provided.
2. Green bonds and regulation: definitions and background
To proceed further in the analysis on whether there is a need for additional regulation in the market of green bonds, the main concepts around this market should be examined. This chapter is focused on this endeavor as well as on explaining the existing regulatory frameworks within the market.
First, it is crucial to understand the concept of regulation as it will be used in this thesis. The term of regulation is broadly defined as the imposition of rules by the government, backed by the use of penalties that are intended specifically to modify the economic behavior of individuals and firms in the private sector. Rate of returns, disclosure of information, standards, ownership and prices ceilings are some of the most commonly used regulatory instruments.5 This is the official definition provided
by the OECD. Within the context of this thesis and most regularly within the framework for the market of green bonds, regulation indicates the various ways used to provide assurance that the issuers and the projects funded are in line with the promised environmental results. It may incorporate a definition on what is considered as green and a set of rules on the use of proceeds, eligibility criteria for projects to be funded, certification and impact reporting procedures and publications, as well as monitoring on the behavior of the issuers.
A bond is awritten and signed promise to pay a certain sum of money on a certain date, or on fulfillment of a specified condition. It is a debt instrument in which the investor loans money to an entity (bond issuer) which pledges to pay the loan principal to the bondholder on a fixed date
(maturity date) as well as a fixed rate of interest for the life of the bond. They are commonly referred to as fixed-income securities.6
Green bonds are considered as innovative financial instruments. Similarly to traditional bonds, green bonds can be roughly divided into seven types; the corporate bonds or 'use of proceeds' bonds backed by a corporate’s balance sheet, the 'project' bonds that are backed by a single or multiple projects, the Asset-Backed Securities (ABS) or bonds that are collateralized by a group of projects, the covered bonds with a recourse to both the issuer and a pool of underlying assets, the Supranational,
5 See: Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.
sovereign and Agency (SSA) bonds that are issued by the International Financial Institutions (IFIs) and various development agencies, the municipal bonds issued by municipal governments, regions or cities, and the financial sector bonds issued by an institution to finance 'on-balance sheet lending'7.
Their structure and risks are identical to those of regular bonds; yet they are differentiated from them mainly by their commitment to use the funds raised to exclusively finance green projects, assets or business activities. Green projects are projects that generate environmental benefits. This definition of green bonds stems from the Green Bond Principles (GBP) provided by the International Capital Market Association (ICMA), which is a worldwide membership association, committed to serving the needs of its wide range of members (issuers, intermediaries, investors and capital market infrastructure
providers). The GBP are voluntary process guidelines that are actually a regulatory attempt within this market. Green bonds are a rather new financial tool. This makes market participants and especially investors to require more information in order to evaluate their options. The ICMA published the GBP in order to support the development of the market for green bonds by providing a point of reference for operating agents that would facilitate the issuance procedures and the screening of investments. However, as I will further elaborate in the following chapters the current regulatory attempts are self-regulation approaches8, without legally binding restrictions.
Green bonds can also be distinguished due to the benefits they provide to their investors and issuers. In some countries there are 'tax credit bonds', according to which investors receive tax credits instead of interest payments, so issuers do not have to bear interest payments. Tax exemptions are a common practice in the Netherlands9 while in the US market issuers can receive cash rebates from the
government to subsidize their net interest payments. As the market is still growing, new incentives, like preferential lending rates (People's Bank of China), credit enhancement instruments, guarantees of repayment (OPIC10) and cornerstone funds (IFC11), are being developed targeting to boost the demand for these bonds. In general, green bonds offer access to capital for environmental projects that otherwise may not be funded, assist the economic transition towards a sustainable use of the environment, offer reputational and economic benefits to issuers and investors and facilitate the establishment of public-private partnerships that may accelerate the pace of green investment and lead to the adoption of new technologies.
Green bonds are provided in order to assist in controlling environmental change through funding green investments. Walter Kahlenborn (1999) illustrated two different approaches to the definition of
7 See: Shishlov Igor, Morel Romain, Cochran Ian (2016), “Beyond transparency: unlocking the full potential of green bonds”, Institute for Climate Economics.
8 Self-regulation is the process whereby an organization monitors its own adherence to legal, ethical, or safety standards, rather than have an outside, independent agency such as a third party entity monitor and enforce those standards. See also: http://dictionary.cambridge.org/dictionary/english/self-regulation.
9 For more information on tax incentives in the Netherlands see: NL Agency, Ministry of Housing, Spatial Planning and the Environment, (2010) “The Green Funds Scheme, A success story in the making”, September 2010, Publication-nr. 1MLGB1004.
10 The Overseas Private Investment Corporation (OPIC) is the U.S. Government’s development finance institution and it mobilizes private capital to help address critical development challenges.
11 The International Finance Corporation announced green bond cornerstone funds, targeting to enhance other investors’ confidence to enter the transaction.
green investment. The first one claims that any form of financial investment can be characterized as green, as long as the investor apart from the traditional targets (liquidity, safety, performance) has also ecological goals with reference to environmental improvements in mind. Alternatively, an investment is defined as green when it contributes to the production of goods or services that positively affect the environment. Projects that usually fall into this category aim to reduce energy consumption, to substitute harmful substances with less damaging ones and/or to minimize pollution. The problem with the first approach is its dependency on the investor's subjective opinion and not on the project's objective properties. However, since the market for green investments is still under development and new products are continuously appearing, there are difficulties in accurately implementing the second view and so the first one is usually preferred.
The main issue considering the definition of green bonds is how to determine the level of green they represent. There are many recent papers trying to define this notion, talking about the ‘Fifty shades of green‘ issue. Nanji Altaf et al. (2014) support that a green bond can take three forms. The use of proceeds of a green ’use of proceeds’ bond, which is the first form, are ring-fenced to fund green initiatives but the instrument is a general obligation of the issuer. Thus, this bond is not linked to the credit or performance of the projects and debt investors have recourse to the issuer. An example may be a bond issued by a government or a commercial bank that finances a certain portfolio of qualifying green projects. In the second form of the project development bond the investor is risk exposed to the specific green project that is being funded, as proceeds are disbursed to a special purpose vehicle that owns a single or multiple green projects. Debt investors have direct exposure to the risk of one or multiple green projects owned by the special purpose vehicle. A bond issued by the project developer that aims to fund specifically the replacement of an older-generation coal-burning plant could be a bond of this kind. The final type is the green securitized bond, where green assets are used to fund and secure the debt instrument. An example can be the issuance of a bond by a commercial bank to refinance a pool of solar panels loans.
According to the ICMA (2016), there are four main types of green bonds that are constantly reassessed following the market developments. In the GBP the green 'use of proceeds' bonds are further divided into two categories; the 'Green Use of Proceeds Bond', which is a standard recourse-to-the-issuer debt obligation, and the 'Green Use of Proceeds Revenue Bond', that is a non-recourse-to-the-issuer debt obligation in which the credit exposure in the bond is to the pledged cash flows of specific revenue streams, taxes etc., and the use of proceeds of the bond goes to the related green projects. The remaining two categories are basically the same, namely, the 'Green Use of Proceeds Project Bond' which stands for projects for which the investor has direct exposure to risk with or without potential recourse to the issuer and the 'Green Use of Proceeds Securitized Bond' which is a bond collateralized by one or more specific projects, including covered bonds12, asset-backed
securities (ABS)13 and other structures. The GBP are the most commonly accepted principles in the
12 A covered bond is a security created from public sector loans or mortgage loans where the security is backed by a separate group of loans. See: http://www.investopedia.com/terms/c/coveredbond.asp#ixzz4oVPPEhDq.
13 An ABS is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-mortgage-backed securities are an alternative to investing in corporate debt. See:
determination of basic definitions on green bonds, used by major issuers like the WB14 as a reference point.
The market of green bonds is mainly characterized by the nature of its issuers and the projects funded. There is a distinction between retail, like Unilever, and institutional issuers, like the EIB. Since 2016, there are also sovereign issuers. Poland and France were the first ones while Sweden and Kenya are following their steps. Green bonds are also distinguished by their use of proceeds in certain sectors such as Buildings & Industry, Waste & Pollution Control, Agriculture & Forestry. Railway projects are most commonly funded by retail issuers while only few bonds are issued by companies within the Agriculture & Forestry sector. Following the developments in renewable energy it is expected that the market will expand further towards the field of energy production.
As stated in S&P Dow Jones Indices (2014), since its inception in 2007, the market has grown rapidly at more than 50% compound annual growth rate (CAGR). The amount of outstanding green bonds more than doubled in 2016 indicating that the market has expanded substantially in terms of scope, average issue size and issuer diversity. According to the Green Bond Database of the publishers of
Environmental Finance15, the current total value of outstanding green bonds is USD 187,89billion
(March 2017). As the CBI annual report (2016) suggests, in spite of increasing demand on behalf of the investors we should not oversee the fact that only 43% of the green bonds issued in 2015 were rated as AAA, primarily due to the fact that their issuance was made by major development banks like the WB, the IFC and the EIB. This report also distinguishes between 2 different measurements; the
http://www.investopedia.com/terms/a/asset-backedsecurity.asp#ixzz4oVOkQJII.
14 The World Bank also participates in ICMA's GBP Executive Committee and its Working Groups on Green Projects’ Eligibility, Impact Reporting and Social Bonds, together with other major institutions and issuers like the European Investment Bank.
15 Environmental-Finance.com is an online news and analysis service established in 1999 to report on sustainable investment, green finance and the people and companies active in environmental markets.
Figure 1: Total green bonds outstanding in billion USD by year. Data for 2017 is until
February. Includes green bonds that follow the ICMA or the CBI GBP, or the Green Financial Bond Directive or the Green Bond-Endorsed Project Catalogue, issued by the People’s Bank of China, or the Listing of Debt Securities Regulations, 2008, issued by the Securities and
‘Climate-aligned Universe’ and the ‘Labeled Green Bonds’. The first one includes both labeled green bonds with use of proceeds defined as green, and a wider universe of bonds financing climate-aligned assets that do not carry a green label but still produce environmental benefits (i.e. unlabeled green bonds). The CBI claims that the market for unlabeled green bonds amounts to USD 694billion
outstanding, which implies that the market is far larger than the labeled bonds measurement suggests and that maybe the market on its own is able to achieve the desired environmental impact without the issuance of the specialized, green bonds. However, this measurement is the result of the CBI's screening process that is dependent on the accuracy of information and their own criteria. Figure 2, provides two separate graphs with information on the ratings of the labeled green bonds and a comparison between maturities of labeled and unlabeled green bonds. As can be seen, unlabeled bonds tend to have longer maturities than the labeled green bonds. Bonds with a longer maturity usually carry more risk and have higher price volatility than bonds with shorter durations. Labeled bonds shall meet certain requirements that may lower their risks and provide some reassurance to investors.
A market-driven standardization process developed by the WB, the EIB, the EBRD and other Multilateral Development Banks (MDBs)16, reinforces this rapid growth in the market. However, international harmonization is still far from accomplished, while the existing literature has already revealed possible problems relating to the certification and proper use of green bonds that can be caused due to the lack of consensus in defining what constitutes the 'green' part. Such issues can be greenwashing, which is the misleading behavior of the issuer regarding the use of proceeds, and keeping double books, in which case both the issuer and the investors are reporting the same green impact in a way that the overall impact will be substantially larger than the actual one. Also, green bonds may trigger windfall profits by promoting initiatives that would have been financed in any case. There are also some concerns regarding additionality. Additionality is the extent to which an input, which can be both an action and an item, adds to the existing inputs and results in a greater aggregate17. A study conducted by the Harvard Kennedy School18, looking at green bonds and sustainable land use, showed that the WB designated green bonds among projects that they already had decided to fund. The authors also indicate the fact that the green bonds issued by the state of Massachusetts were planned to finance state projects regardless of the green labeling of the bond. This study provided some strong arguments on additionality and the idea that there is no need for a special market for green bonds as they tend to finance projects that could have been funded within the scope of the regular bond market. Certain market participants believe that for the green bond market to have true value added it should ultimately finance investments that are additional, not finance already existing projects or projects that would happen anyway, through the conventional bond market. However, there are agents like the CBI that support the importance of refinancing
16 See: AfDB, AFD, ADB, EBRD, EIB, IDB, IBRD, IFC, KfW, FMO, NIB, (2015) “Green Bonds Working Towards a Harmonized Framework for Impact Reporting”.
17 See: Business Dictionary, http://www.businessdictionary.com/definition/additionality.html.
18 For more information see: duPont, C., Levitt, J. and Bilmes, L. (2015) Green Bonds and Land Conservation: The Evolution of a New Financing Tool, Faculty Research Working Paper, Harvard Kennedy School, December 2015.
projects stating that bonds are refinancing tools that allow issuers to free up capital from existing assets and project developers to be confident in the early high-risk stages of the projects.
Figure 2: Left: Labeled green bonds rating Right: Labeled Vs. Unlabeled maturities
Source: Climate Bonds Initiative, HSBC, “Bonds and Climate Change The state of the market in 2016” Since greenwahing is considered as the most significant risk in this market, I will elaborate more on it. According to Dahl R.(2010), greenwashing is not related only to green investment and it is not a recent phenomenon. The term has a wider use and since the mid-1980s it has been used to describe the practice of making unwarranted or overstated claims of sustainability or environmental friendliness by market participants aiming at increasing their market share. In recent years, as companies are striving to meet the increased investors’ and consumers’ demand for greener projects, products and services its use tends to rise.19 Agents that engage themselves with greenwashing are targeting to use
environmental marketing in order to elicit positive reactions, gain access to green funds and increase their market share whereas they may not meet the criteria to do so. The advantage for these agents is that they manipulate investors’ and clients’ perception without actually bearing the costs of altering their strategies and activities to being beneficial for the environment. A weak regulation over
environmental advertising and investing facilitates this misallocation of funds and misinformation of clients. In the current regulatory schemes regarding green bonds, ratings and verifications of green investments are holding a vital role in the proper allocation of resources.
Market participants are developing voluntary guidelines, known as ‘Green Bond Principles’, that promote transparency and integrity by providing guidelines for issuing green bonds. However, the core definition on the meaning and level of ‘green’ is still ambiguous. The Paris Green Bond Statement (2015), backed by 27 global investors, recognized bodies like the CBI as major contributors to this issue, making the Climate Bonds Standard & Certification Scheme a popular point of reference among issuers. It includes robust frameworks for monitoring and reporting. A Climate Bond Certification is provided to those that conform with the standards. For this purpose CBI names certain independent
19 See: Dahl R. (2010) “Green Washing: Do You Know What You’re Buying?” Environmental Health Perspectives 118.6, pp.A246–A252, 2010.
third parties as 'Approved Verifiers'20 that audit green bonds. This list of Approved Verifiers has earned the investors and issuers trust globally despite the fact that the CBI is just a non-profit organization. Currently, this is one of the most crucial issues regarding this market, as there is not an exhaustive international legal framework for regulation. Domestic supervision usually accounts only for the regular bonds requirements. Issuers should acquire certifications to prove to their investors that projects funded are indeed green but there is not any legitimate framework that imposes this behavior on them. The lack of a specialized supervisory authority to assure the proper use of proceeds leaves room for further discussion on the occurrence of issues like greenwashing. Many market
participants believe that applying a strict regulation may create additional costs in sourcing deals and verifying their impact, potentially limiting market liquidity and investors demand. On the other hand, issuers do see the potential risk in greenwashing, especially given the reputational benefits for
investors. Another view, stated by Wood D. et al. (2011), is that the investors are those responsible for specifying the credit quality and financial characteristics they expect from green products, in order to balance the standards across the 'shades' of green. There are some countries like China, India and Morocco that released official green bonds guidelines but unless a global-level agreement is achieved, it might just result in diminishing the liquidity of the bonds issued in these countries.
Most recent papers are raising concerns about this need for international regulation. The G20 GFSG, European Commission and other institutions are currently working towards a harmonized framework as they recognize that the lack of consensus regarding what constitutes a green bond along with the weaknesses in transparency and reporting which are still voluntary, creates uncertainty. Uncertainty can cause hesitance and illiquidity in the market. A proof of that may be the fact that retail investment remains limited because green bonds are not yet well integrated into mainstream funds, indices and other products while they are less liquid than other instruments as well. In addition, even though institutional investors like pension funds have expressed increased interest in green bonds, according to Della Croce R. et al. (2011), their asset allocation to such green investments remains low. The authors state that this is due to the absence of environmental policy support and other barriers like the lack of appropriate investment vehicles and market liquidity, scale issues, regulatory disincentives and lack of knowledge, track record and expertise among investors about these investments and the related risks.21 Hamilton (2009) claims that renewable energy policy and regulatory framework are
critical in influencing where capital is invested22. Della Croce R. et al. (2011) invigorate this argument, stating that such policies have to be clear and legal with an apparent regulatory framework and strong incentives and implementation rules, and long-term horizon.
After providing evidence on the importance of the creation of an international legal framework to facilitate the proper functioning of this market, this thesis proposal will be to achieve the
20 The worldwide Verifiers as stated in this list are EY, KPMG, OEKOM Research AG, TÜV NORD CERT, Vigeo Eiris, Carbon Trust, PwC, NSF, Sustainalytics, First Environment, DNV-GL and Bureau Veritas.
21 For more information on pension funds and green investing, see: Della Croce R., Kaminker C., Stewart F. (2011), The Role of Pension Funds in Financing Green Growth Initiatives, OECD Publishing, Paris, September 2011.
22 See: Hamilton, K. (2009), Unlocking Finance for Clean Energy: The Need for 'Investment Grade' Policy, Chatham House Briefing Paper, 2009.
implementation of this framework by establishing a global authority which may be a part of a major institution, like the WB or an independent organization. For this purpose, the next chapter develops four case studies that will enhance our understanding of the market and the need for an organization of regulation.
3. Case studies
In this chapter, four case studies of green bonds issuance will be discussed. This provision of information aims to examine the diversity among different regulatory systems and approaches
regarding the allocation of proceeds, certification procedures and impact reporting. The first two case studies focus on three major IFIs, namely the International Bank for Reconstruction and Development (IBRD), which is part of the World Bank Group, the EIB and the EBRD. Since the EIB and the EBRD are EU institutions they will be incorporated in the same case study. The IBRD, the EIB and the EBRD have contributed to the promotion of transparency by being three out of the eleven signatories that developed a Harmonized Framework for Impact Reporting.
The third case study discusses the issuance of green bonds in the Netherlands. The Dutch green bond market has proven to be rather wide in terms of issuers’ diversity while its development is
accelerating. There are currently eleven issuers in the market, whom will be examined separately in subsections considering their use of proceeds and selection procedures. Aggregate information will be provided in the beginning of this case study with regards to the regulatory framework, the overall issuance, the types of issuers and the reviewing and reporting processes. In the final case study the Chinese green bond market will be presented. Even though China has entered the market for green bonds only two years ago, it certainly dominates the market with more than thirty five issuers in 2016. Due to its size, I preferred to elaborate China’s case using only aggregate data instead of providing also individual case studies for each issuer.
3.1 World Bank Group - IBRD
The World Bank Group consists of five organizations, namely the IBRD, the International Development Association (IDA), the IFC, the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID). The IBRD together with the IDA make up the WB. The difference between these two institutions lies in their clients. Specifically, the IBRD lends to governments of middle-income and creditworthy low-income countries, while the IDA grants and lends to the poorest governments23.
23 Eligibility for the IDA support depends first and foremost on a country’s relative poverty, defined as GNI per capita below an established threshold and updated annually ($1,215 in fiscal year 2016). For more information see: https://datahelpdesk.worldbank.org/knowledgebase/articles/378833-how-are-the-income-group-thresholds-determined
The issuance of green bonds within the WB is coordinated by the IBRD. According to the IBRD, developing countries will be affected hardest by climate change, jeopardizing recent success in the fight against poverty, hunger, disease and improving people’s living conditions. Green bonds are a part of the WB’s “Strategic Framework for Development and Climate Change” which aims to encourage innovation by stimulating both public and private sector activity towards climate sustainability. The WB Green Bond was designed in partnership with Skandinaviska Enskilda Banken (SEB) as a fixed-income instrument to finance climate change related projects and is triple-A rated.
In 2015, World Bank Group adopted a Climate Change Action Plan to assist developing countries achieve the targets set in the Paris Climate Agreement. Eligible projects focus on the impact areas of renewable energy and energy efficiency, transportation, boosting the resilience of cities, climate-smart land use, strengthening the competitiveness of the green sector, or extending disaster readiness.
3.1.1 Issuance information
In 2008, the WB issued its inaugural green bond with a value of SEK 3.350 billion (USD 384 million). There was a peak in its annual issuance in 2010, with almost USD 3 billion equivalent in green bonds in 15 currencies. Following a fall in 2012, issuance increased again reaching approximately USD 2.5 billion in 2014. In the consecutive years annual issuance appears to start stabilizing around USD 1.4 billion. The aggregate value of green bonds issued by the WB since its inaugural issuance, exceeds USD 10 billion in 18 different currencies.24
Figure 3: Total annual issuance of World Bank Green Bonds from 2008 until 2016. Amounts are expressed in millions of USD. Source: World Bank
There are two main types of projects that meet the WB’s Green Bond eligibility criteria. The Mitigation Projects aim to alleviate climate change and incorporate low-carbon and clean-technology programs. They may include solar and wind installations, funding for new technologies that permit significant
24 For the exact amounts of annual issuance see: Appendix, Table 1. 0 500 1000 1500 2000 2500 3000 3500 2008 2009 2010 2011 2012 2013 2014 2015 2016
reductions in greenhouse gas (GHG) emissions, rehabilitation of power plants and transmission facilities to reduce greenhouse gas emissions, greater efficiency in transportation, including fuel switching and mass transport, waste management and construction of energy-efficient buildings, carbon reduction through reforestation and avoided deforestation. The Adaptation Projects target to familiarize climate change and comprise investments in climate-resilient growth. They may include protection against flooding, food security improvement and implementing stress-resilient agricultural systems, sustainable forest management and avoid deforestation. These so-called green projects promote transition to sustainable and low-carbon growth in the recipient country.
3.1.2 Eligibility criteria and certification procedures
All projects funded by the Green Bond program are selected by the WB environment specialists and meet the WB’s eligibility criteria for low-carbon and climate resilient development. The WB
commissioned the Center for International Climate and Environmental Research at the University of Oslo (CICERO) to assess its eligibility criteria25.
The WB takes into account the recipient country's development goals and along with the WB's Systematic Country Diagnostic (SCD) it develops the Country Partnership Framework (CPF). SCD is a comprehensive diagnostic study, which identifies the barriers to eradicating extreme poverty and enhancing prosperity in the country. Projects go through two management reviews:
(i) a quality review which scrutinizes the correspondence of the design with the specified objectives and how the project addresses potential risks to the desired outcomes; (ii) a decision meeting based on the designed and assessed project, upon its evaluated costs
and financing plan, defined responsibilities such as monitoring and risk management, etc.). After the management reviews, the WB Board of Executive Directors, which is a resident Board with 25 chairs representing its member countries, ensures the projects’ compliance with the governmental targets and with WB safeguard policies.
Apart from the standard selection procedure, which consists of the alignment with the Country Partnership Framework, identification, preparation, appraisal and Board approval, implementation, supervision, completion and evaluation steps, green projects follow three additional steps to ensure that they meet the WB’s Green Bond eligibility criteria, namely the Review of the Project’s Pipeline, the Screening of Eligible Projects and the Allocation of green bonds proceeds and progress and impact reporting to investors.
Green bond proceeds are attributed to a special account until their allocation to eligible projects. The allocation of funds is taking place in the form of a loan through signing the project loan agreement between the WB and the recipient country. The WB acts as a supervisor for the projects’ performance by providing support and monitoring the conformity with the project loan agreement. The
implementing country is obliged to provide regular reports and formal reviews (at least once a year) on project progress. In order to better appraise and measure the projects’ effectiveness regarding their objectives, the WB and the government collaborate for accumulating the necessary data about the projects’ progress, results and impacts 26. The WB itself provides impact reporting on the projects financed by its Green Bond program. Since 2015, it publishes annual reports about the Green Bond eligible projects. Selected results indicators, WB loan amount, share of loan amount to total project costs, and the use of proceeds, are disclosed to these reports, with a focus on data that is of interest to investors. The reporting is based on ‘ex-ante’ estimates of impacts at the time of project
evaluation. Furthermore, the reports focus on emphasizing the diversity of countries, projects and sectors rather than cumulative impacts.27 Additionally, the WB publishes all related documents in its
portal. Some examples are: all Project Appraisal Documents, Integrated Environmental Data Sheets, and relevant Environmental Impact Assessments and Management Plans, Social Assessments, Procurement plans, etc.
3.1.3 CICERO Second Opinion
As an independent research institute, CICERO provides second opinions on institutions' framework and guidance for assessing and selecting eligible projects for green bond investments, and assesses the framework’s robustness in meeting the institutions’ environmental objectives. The second opinion is based on documentation of rules and frameworks provided by the institutions themselves. Also, in 2015, they introduced the Shades of Green methodology, which indicates how well a green bond aligns with a low-carbon climate resilient future, using a rate between light, medium and dark green28.
In the case of the WB, CICERO after reviewing the eligibility criteria and the governance structure at the WB, concluded that these together provide a sound basis for selecting climate friendly projects.29
3.2 European Union
The Capital Markets Union (CMU) Action Plan has set sustainable and green finance as a priority and so green bonds are considered as a vital instrument to raise funds for sustainable investments focused on the environment. CMU is the European Commission’s plan aiming to mobilize capital in Europe. Its long term target is to create more integrated, deeper and resilient capital markets that will eventually merge into a single capital market in the EU.30
26 For more detailed information on specific projects reviews and impact reports, see: The World Bank Treasury, Green Bond IMPACT REPORT, June 2016, http://treasury.worldbank.org/cmd/pdf/WorldBankGreenBondImpactReport.pdf. 27 For more detailed information see: The World Bank Green Bond Process Implementation Guidelines.
28 For more information see: http://www.cicero.uio.no/en/posts/single/cicero-shades-of-green.
29 For more detailed information see: CICERO (2015), ‘Second Opinion’ on World Bank’s Green Bond framework, 5th May 2015.
30 For more detailed information see: https://ec.europa.eu/info/business-economy-euro/growth-and-investment/capital-markets-union_en.
Within the framework of the EU green bonds have been issued by two of its major institutions, namely the EIB and the EBRD. Therefore, this case study will be developed in two consecutive sections. In the first one the issuance by the EIB will be presented, while in the second we will examine the case of the EBRD.
3.2.1 EIB – Climate Awareness Bond
The EIB was created by the Treaty of Rome in 1958, and is owned by the Member States of the EU. Its mission is to provide finance and expertise for sound and sustainable projects that contribute to the EU policy objectives. The EIB is the EU's long term lending institution. Its lending activities are mainly funded via bond issuances in international capital markets and its debt products are purchased by both institutional and retail investors. Its green bonds issuance contributes to the growth and the integrity of the market. The EIB promotes transparency and accountability by participating in the cross-market forum for establishing the Green Bond Principles (GBP).
The EIB is committed to provide leadership in climate-related finance while it sets Climate Action as a top priority in its Climate Strategy. The Climate Strategy was adopted by the EIB in 2015 with the goal of boosting the impact of climate lending, upsurge support for adaptation and further integrate climate contemplations across all investments. The EIB is committed to dedicate at least 25% of its total financing to support climate action investments. This share is set to rise to 35% for developing counties outside the EU by 2020.31
3.2.1.1 CAB Issuance
In 2007, the EIB issued the world’s first green bond; the Climate Awareness Bond (CAB). Since then it has been the largest issuer of green bonds with over EUR 16 billion raised across 11 currencies.
Following an upward trend CAB annual issuance peaked at EUR 5.076 million in 2015. The consecutive years are also promising, since only in the first half of 2017 the EIB has already launched EUR 2.214 million equivalent in green bonds.32
31 For more information see: European Investment Bank, EIB Climate Strategy Mobilising finance for the transition to a low-carbon and climate-resilient economy.
The eligible sectors for funding through CAB are Renewable Energy that may include wind, hydro, solar and geothermal energy production projects, and Energy efficiency that can incorporate projects for district heating, co-generation, building insulation, energy loss reduction in transmission and
distribution and equipment replacement with significant energy efficiency improvements. Using the CAB’s proceeds to refinance existing loans is not possible. Only new projects can be funded through the EIB’s green bonds.
3.2.1.2 Eligibility criteria and issuance related procedures
Considering transparency and accountability, the EIB follows the ICMA’s GBP and uses KPMG as an external auditor of the CAB program. KPMG confirms CAB's alignment with the GBP and the high degree of reliability concerning responsibilities, operational criteria, allocations and impact reports. The EIB was the first to include a report on green bonds allocation of proceeds in its Sustainability Report in 2009, while in 2015 it published the market's first complete impact report.
Since the CAB program is aligned with the GBP, it shares its four core components about the use of proceeds, the process for project evaluation and selection, the management of proceeds and reporting. For the CAB's program coordination, the EIB has implemented a segregation of
responsibilities between the Projects Directorate and the Finance Directorate. The eligibility criteria are defined by the Projects Directorate which receives and reviews loans approved by the Board of Directors every month. On a quarterly basis it checks and validates the Finance Directorate's reports and every year it provides the impact report of eligible projects. The Finance Directorate provides regular financial reports and twice a year it books the balance of the unallocated CAB proceeds into the CAB-portfolios and calculates the daily interest on the daily outstanding balance of the
unallocated CAB proceeds.
Eligible projects must meet the environmental sustainability objectives, described in the Treaty on the Functioning of the European Union (TFEU), and in the 2030 EU Climate and Energy Policy Framework (2030 CEPF), approved by the EU Council on 24 October 2014. According to these objectives, the EU
Figure 4: Total annual issuance of EIB's CAB from 2007 until 2016. Amounts are expressed in billions EUR. Source: European Investment Bank
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 1 2 3 4 5 6
sets as a priority combating climate change and promoting energy efficiency and saving, and the development of new and renewable forms of energy.33
The first step for project evaluation and selection is the project's financial, economic, technical, environmental and social assessment. After that the EIB’s Board of Directors proceed to the approval of the loans based on the EIB‘s environmental and social due diligence and with the EIB Environmental and Social Handbook34. The first one conforms with the EIB Statement of Environmental and Social
Principles and Standards35, which irradiates the EIB’s approach to potential environmental and social
impacts and risks stemming from its activities. The EIB’s Handbook lists operational prerequisites for different types of financial products and situations. The following stage is the assessment of the projects by the Projects Directorate's engineers and economists, with the final outcome expressed in percentage of eligibility and registered in the EIB’s IT system. As a final step, the loan is signed
between the EIB and the recipient and then the loan is disbursed.
For the management of CAB proceeds a special sub-portfolio is created as a part of the operational money market portfolio within the EIB’s Treasury, in which the proceeds are being deposit. The EIB has developed a specially designed IT tool that automates retrieval, processing and matching of CAB-related data. CAB-proceeds are allocated automatically by the IT-tool to new disbursements that take place after the issue date only (no refinancing), on a first-in-first-out basis. Therefore, this tool allows for mechanical monitoring of the allocation of proceeds.
About its reporting commitments towards its investors the EIB publishes the Environmental and Social Data Sheets (ESDS), which summarize the environmental and social evaluation of projects at the assessment stage and are unaudited, the annual Sustainability Report that includes aggregate results of the Carbon Footprint Exercise36, unaudited reports on the use of proceeds, annually in the Financial
Report and semiannually in CAB Newsletter, and on the expected impact, annually in CAB Newsletter, and the final reports on use of proceeds and impact, annually in the audited CAB statement.
3.2.2 EBRD – Environmental Sustainability Bond (ESB)
The EBRD was established in 1991 and is an EU-owned institution. It launched its inaugural green bond in 2010. Its green bonds are triple-A rated and support state and private sector environmental businesses in the EBRD’s countries of operations. The proceeds from the bonds are directed towards the EBRD’s environmental projects through legal definitions contained in the bond’s documentation. The EBRD’s Environmental and Sustainability, Banking, Treasury and Legal departments established
33 The 2030 CEPF objectives are: minimum 40% domestic reduction in EU GHG emissions, compared to 1990, minimum 27% share for renewable energy and minimum 27% improvement in energy efficiency. For more information see: https://ec.europa.eu/clima/policies/strategies/2030_en.
34 See: European Investment Bank (2013), EIB Environmental and Social Handbook, Version 9.0 of 02/12/2013.
35 Standard no. 4, in particular, prescribes full alignment of the EIB’s approach to climate action with the climate policy of the EU. For more information see: European Investment Bank (2009), EIB Statement of Environmental and Social Principles and Standards.
36 For more information see: EIB (2014), European Investment Bank Induced GHG Footprint. The carbon footprint of projects financed by the Bank. Methodologies for the Assessment of Project GHG Emissions and Emission Variations, Version 10.1, 3 April 2014.
the eligibility criteria for projects to be nominated as part of the Green Project Portfolio (GPP) that will be funded by the EBRD’s environmental sustainability bonds (ESBs). The Environmental and
Sustainability Department (ESD)’s specialists review the projects to ascertain that they are consistent with the GPP criteria. Specifically, only projects in respect of which the entire, or substantially the entire amounts disbursed are directed at environmental goals are included.
3.2.2.1 ESB Issuance
The EBRD has issued 63 bonds totaling EUR 3,79 billion equivalent since 2010, denominated in eight different currencies. In 2016, its issuance reached EUR 1,78 billion. There is no minimum issuance size for ESBs but their total amount outstanding will not exceed 70 % of the GPP.37
Figure 5: Total annual issuance of the EBRD's Environmental Sustainability Bond from 2010 until 2016. Amounts are expressed in million EUR. Source: EBRD Annual Reports
3.2.2.2 Eligibility criteria and issuance related procedures
Considering transparency and accountability, the EBRD also follows the ICMA’s GBP and uses CICERO as an external auditor of the ESB program. CICERO confirms that the EBRD’s procedures are
standardized, transparent, include robust long-term goals. Furthermore, the EBRD’s Environmental and Social Policy38 includes 10 environmental and social Performance Requirements (PRs) which all
the EBRD-supported projects are expected to meet. The PRs are consistent with the Equator Principles Performance Standards39 but also include a number of additional requirements, such as compliance with the EU environmental standards.
37 For the exact amounts of annual issuance see: Appendix, Table 3.
38 See: EBRD (2014), ENVIRONMENTAL AND SOCIAL POLICY. As approved by the Board of Directors at its Meeting on 7 May 2014.
39 The Equator Principles (EPs) is a credit risk management framework for determining, assessing and managing environmental and social risk in Project Finance transactions. See:
http://equator-principles.com/resources/Frequently%20Asked%20Questions.pdf. 0 200 400 600 800 1000 1200 1400 2010 2011 2012 2013 2014 2015 2016
The proceeds of ESBs are allocated to support a portfolio of environmentally and socially sustainable projects, namely the GPP, which currently encompasses investments in six areas; Energy Efficiency, Renewable Energy, Water Management, Waste Management, Environmental Services and Sustainable Public Transport. Environmental impact of eligible projects is described in the “Focus on
Environment”40 presentation and in the annual Sustainability Report. The GPP framework also allows for refinancing of existing project due to the fact that its projects have long disbursement periods. Eligibility criteria are reviewed on a regular basis to ensure their continued consistency with investor and market requirements for green investments. The selection process defines clear roles and
responsibilities, and has been reviewed by the EBRD’s internal audit. A key feature of eligible projects is that they have to allocate 90% or more of the proceeds to environmental purposes. The selection process is a combination of automated and manual steps, with every project checked and signed off by the ESD. GPP projects are reviewed quarterly to ascertain whether they are consistent with the GPP criteria established.
The GPP selection procedure has five stages. On a quarterly basis, the Operational Strategy and Planning department develops the Proposed Project List (PPL), which encloses information on the projects, their maturities and operating assets. The Treasury and Funding departments assess the PPL on its projects compliance with the EBRD’s criteria. The final review and approval is provided by the ESD. As a third step, the EBRD ensures that the proceeds of its ESBs are directed to its GPP and restrains the total amount of ESBs outstanding to 70% of the GPP. In the case that the issued bond amount exceeds the value of the GPP, the excess funds are invested in money market instruments indicated in the terms of the bonds until they can be assigned to projects in the GPP.41
3.3 The Netherlands
This case study differs substantially from the previous two, since we will not examine the issuance made by a single issuer, but we will see the case of various issuers within a specific country. Instead of an IFI we have now an aggregate scheme of both private and public issuers; of financial intermediaries and private companies. There are several kinds of issuers in the Dutch green bond market. After a brief explanation of the Dutch framework for green financing and investments, certain aspects of Dutch green bond market will be analyzed. For this case study I have examined all issuers individually and then summarize their most important features into an aggregate case study. The focus will be on the institutions issuance, use of proceeds, projects selection procedures, reporting and means of certification.
The Netherlands has developed a unique method of funding environmental projects. In 2010, the NL
40 For more information: http://www.ebrd.com/focus-on-environment.pdf. 41 For a summary of the Selection Procedure see: Appendix, Table 4.
Agency42 republished the Green Fund Scheme (GFS), which is a tax incentive scheme enabling individual investors to finance green projects that benefit the environment, and was initially
implemented in 1995. Clarifying the eligible projects, boosted the grow of more energy-sustainable houses (greenhouses), renewable energy projects and organic farming initiatives funded by a wide group of Socially Responsible Investments (SRI). The Dutch government attracts private capital at a rate of 1,9% annually to allocate funds to pioneering and environmentally sustainable projects designated by the government. As of 2011, 234.400 individuals have invested more than EUR 6,8 billion in green funds, allocated to more than 5.000 projects. Banks that participate in this program are called green intermediaries. The Ministry of Finance decides whether or not an intermediary qualifies as green. To be nominated as green, the intermediary, must allocate 70% of assets to green projects. Green intermediaries can allocate at most 30% of their green funds’ portfolio to non-green projects in order to alleviate risk. As of the end of 2008, there were eight green intermediaries, representing in essence all of the Netherlands’ major banks: ABN AMRO Groenbank, ASN Groenprojectenfonds, Fortis Groenbank, Fortis Groen Fonds, ING Groenbank, Nationaal Groenfonds, Rabo Groen Bank, and Triodos Groenfonds. Individuals who invest or keep their savings in a green intermediary, receive a lower rate than the market interest rate, which is compensated by a tax incentive. This tax advantage is
essentially a 1,2% tax exemption on capital income and a 0,7% exemption on income tax. In addition, green capital is exempt from capital tax, up to a maximum of EUR 52.579 per person. This system has been developed with the purpose to enable the banks to charge green projects a lower interest rate. A study conducted by the Netherlands Enterprise Agency (the Rijksdienst voor Ondernemend
Nederland or RVO) in 2011, illustrated that, in monetary terms, the environmental benefit of the GFS amounted to around EUR 360 million per year, while the social and governmental costs were EUR 38 million and EUR 137 million, respectively, as illustrated in Figure 6.
In 2013, the Netherlands issued its Energy Agreement for Sustainable Growth (EASG), providing guidelines towards assuring a sustainable, long-term energy supply for the country. It encompasses requirements on energy conservation, boosting energy from renewable sources and job creation. The EASG also underlined that the energy efficiency of residential buildings is crucial to the successful shift to a sustainable economy. EASG aims at reducing final energy consumption averaging 1,5% annually, increasing the proportion of energy generated from renewable sources to 14% by 2020 and to 16% by 2023, creating at least 15.000 full-time jobs in the next years, improving the competitive position of companies, providing investment security and innovation support, decreasing the costs of energy for households (EUR 321 million) and businesses (EUR 266 - 331 million), compared to the Coalition Agreement, and substantially investing between 2013 and 202043. 44
42 NL Agency is a department of the Dutch ministry of Economic Affairs responsible for the implementation of sustainability, innovation and economic development programs for various governmental bodies.
43 subsidies (EUR 13 – 18 billion), infrastructure costs, private investments.
Figure 6: GFS Environmental Costs and Benefits. The monetary value of environmental costs is calculated as a gross effect of an overestimation and underestimation due to the fact that influence sustainable investment decisions and the difficulty to place a monetary value on all the societal effects. Source: De duurzaamheidswinst en economische winst van de Regeling
groenprojecten, CE Delft, February 2013.
The Dutch Banking Association (DBA) is a party of the EASG and is considered as the link between the banking sector, the government and the public. Its purpose is to attain a strong, healthy and
internationally competitive banking system for the Dutch and foreign banks and credit institutions operating in the country. The DBA acts as a collective representative of banks in discussions of social issues and provides a platform for knowledge, exchange of information and protection of interests on matters that may affect the sector in future. The DBA published the Climate Statement Dutch Banking Association (CSDBA) in October 2016, which exemplifies the common aims and collective actions of Dutch banks vis-à-vis climate change. The signatories of the CSDBA were the DBA, the Triodos Bank, the Rabobank, the BNG, the ASN Bank, Van Lanschot Bankiers, the ING Bank, the KAS BANK, the Nederlandse Financierings Maatschappij voor Ontwikkelingslanden N.V, the Nederlandse
Waterschapsbank N.V. (NWB), the SNS Bank N.V., the NIBC Bank and the ABN AMRO Bank N.V.
According to CSDBA, Dutch banks publish annual sustainability reports, in which they determine how they define and curtail the environmental risks, concomitant of their financing and investing activities. Also, they state their commitment to minimize their own business’ GHG emissions and to encourage their clients to reduce CO2 emissions by providing related products and services to this endeavor. A special reference was made in this statement about house mortgages and business premises as they represent a significant part of Dutch banks’ balance sheets. Currently, the DBA works along with the Dutch government on how the sector can contribute more to enhancing real estate sustainability, since up to date, the contribution of banks to the climate issue is critical, but inadequate.
Consequently, they encourage the Dutch government to implement binding, effective European climate objectives that will, among other things, serve to safeguard the level playing field in the market. Also, the DBA advocates the provision of incentives for companies and institutions, for publishing their CO2 emissions in order to facilitate banks in the inclusion of climate impact in their
0 100 200 300 400
Social costs Governmental costs Monetised Environmental Benefits
Co st s/ Ben ef its in E U R m ln
Costs and monetised environmental benefits of the Green Funds Scheme
financing and investment decisions. Harmonized policies and sound criteria are of vital importance to the application of innovative tools like green bonds, in order to avert money leaking into financial tools that have no added value for the environment.
De Nederlandse Bank (DNB), holds an important role in regulating the Dutch capital market. According to the DNB, green bonds are considered a vital tool in enlarging the capital supply for green
investments, reducing maturity mismatch, and pooling of smaller projects. In addition, the DNB
recommended to harmonize country-specific guidelines for green bonds at international level, in order to avoid greenwashing.45
The first issuance of Green Bonds in the Netherlands was made by the Entrepreneurial Development Bank (FMO), in 2013 and accounted for EUR 500 million. Yet, the FMO actually issued a so called Sustainability Bond which also contains social impact projects. Approximately 80% of the proceeds were allocated to green projects. In the consecutive years green bonds issuance has been accelerating reaching the amount of EUR 6332,1 million in 2016. The Netherlands is the fifth largest issuer of green bonds worldwide. The main domestic issuers are TenneT (total EUR 3 billion issuance),
the NWB Bank (total EUR 2,62 billion issuance), and BNG (total EUR 1,69 billion issuance).
Figure 7: Aggregate Green Bonds issued in the Netherlands from 2013 until 2016 (in billions of EUR). Sources: Issuers’ annual reports and the CBI´s statistical data.
There are eleven issuers in the Dutch green bond market, namely: the BNP Paribas, the NWB, the Internationale Nederlanden Groep (ING), the Algemene Bank Nederland (ABN) AMRO46, the TenneT,
the Rabobank, Obvion hypotheeken, Alliander, FrieslandCampina, the Entrepreneurial Development Bank (FMO) and the Bank Nederlandse Gemeenten (BNG)47.
The EASG’s targets have guided the Dutch market towards sustainability through innovative financial
45 See: DNB (2017), Position Paper, “Bottlenecks in funding green investments”, 2 February 2017.
46 ABN AMRO is a result of a merger in 1991. AMRO bank itself was the outcome of an earlier merger in the 1960s between the Amsterdamsche Bank and the Rotterdamsche Bank.
47 For detailed information on green bond issuance per institution and per year see: Appendix, Table 5. 0 1 2 3 4 5 6 7 8 2013 2014 2015 2016
initiatives. The CSDBA has pledged banks to provide sustainability reports and has enhanced the provision of related products to their clients. Even though the collaboration between DBA and DNB is promising regarding the creation of a proper monitoring and reporting framework, it only concerns the banks. In the Dutch green bond market also corporate issuers and other institutions are operating.
Figure 8: Issuers’ types in the Netherlands. *Obvion is a subsidiary of the Rabobank focused on mortgages and thus is placed in the Commercial Banks category. **FMO is a public-private company, with the Dutch State holding 51% of its shares.
As can be seen in Figure 8, 46% of the total issuers are commercial banks, while 27% are corporate issuers. The NWB, FMO and the BNG Bank are the only public bodies that have launched green bonds. Three out of the five commercial Banks, as well as the BNG Bank and the NWB which are public institutions, have been signatories of the CSDBA. This means that nearly half of the Dutch operating issuers have pledged to follow the principles of this statement.
Despite the fact that the CSDBA or any other state law do not provide guidelines regarding certain eligibility criteria, principles, external reviewing of the issuance procedures and the bonds themselves, issuers in the Netherlands tend to follow the internationally recognized GBP. The majority of the issuers align their practices with the CBI principles, while 18% follow the ICMA guidelines. In addition, all issuers have chosen to commission third parties to review their green bonds and their compliance with the GBP. As illustrated in Figure 9, Oekom Research is the most popular choice amongst issuers, reviewing 28% of the green bonds in the Dutch market. One of the most important features of the Dutch market is that even though reporting is not mandatory for the green bonds’ issuance, all the operating issuers provide regular reports on the allocation of proceeds and the environmental impact.
Figure 9: Right: Alignment of green bonds issued in the Netherlands with international
principles (CBI, ICMA, CICERO). Left: External reviewers in the Netherlands (multiple colors indicate the use of multiple reviewers for different tasks).
Source: Issuers’ reports and websites.
The rest of this chapter is split into eleven sub-sections, each for one of the issuers in the Dutch green bond market. The small number of issuers, the variety in eligibility criteria and the differences in the allocation of proceeds are the reasons for the inclusion of a detailed presentation of these issuers and the information that we will focus on.
3.3.1 BNP Paribas
BNP Paribas is an international banking group and was established in the Netherlands in 1863. It issued its first Green Bonds in November 2016. As of the end of 2016, eligible green assets account for EUR 627 million, with 90% of their proceeds used in wind technology projects. It has a strict Green Bond Framework which was established in compliance with the ICMA’s GBP.
Figure 10: BNB Paribas’ green bond, use of proceeds.
Source: BNB Paribas annual reports
11%
53% 36%
Use of Proceeds - BNP Paribas
CSP & Solar PV Onshore Wind Offshore Wind
Invested funds exclusively finance or refinance sectors that positively affect the environment, namely: Renewable Energies, Energy Efficiency, Mass and Public Transportation, Water Management and Water Treatment, and Recycling. The eligibility criteria are a two-step process which involves an internal screening selection by the BNP Paribas’ Green Bond Committee and an external review by third parties.
3.3.2 NWB
NWB is a public limited liability company and has issued three green bonds; a 5-year EUR 500 million green bond in 2014, a 10-year EUR 1 billion one in 2015 and a 10-year USD 1 billion green bond in 2016 with an addition of USD 250 million. The green bonds’ proceeds are reserved in an internal account at NWB Bank dedicated for lending to the Dutch Water Authorities, which are governmental bodies with climate change adaption as an essential part of their tasks. A large part of NWB’s future
Figure 11: Allocation of expenses of water authorities over the period 2014-2016.
Source: NWB Green Bond Newsletter 2016
investments in flood control and water management is performed under the umbrella of the Dutch “Delta Programme”48 which was set up by the Dutch government to facilitate the mitigation and adaptation of these schemes for climate change. Projects financed by the Water Authorities are aligned to their mandate which is defined in the Dutch Water Act according to which, proceeds are used to fund projects that aim at the mitigation of climate change regarding waterway management, the adaptation to climate change, and/or biodiversity projects49.50
The NWB proceeds allocation on projects with regard to flood protection, sanitation and dredging of waterbeds and water system management, quality and quantity, exceed 65% of the total. In figure 11, we can see the allocation of expenses of water authorities over the years 2014-2016, when the NWB
48 For more information see: https://english.deltacommissaris.nl/delta-programme/contents/what-is-the-delta-programme 49 Biodiversity projects are water related biodiversity projects rather than directly climate related.
50 See: Ministry of Transport, Public Works and Water Management, Water Act, February 2014 1% 28% 9% 8% 3% 20% 20% 3% 2% 0% 6%
Allocation of the expenses 2014-16
Planning Flood protection Other flood defences Waterlevel management
Sanitation and dredging of waterbeds
Water system management, quality and quantity Transport and cleaning of wastewater
Disposal of sewage sludge Roads
Managing waterways Other
