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Legal Update

Green Bonds Grow Up—But Still Have Significant Room to Grow

20 April 2016
Mayer Brown Legal Update

The first quarter of 2016 may well be remembered as the time when so-called “green” bonds grew up. Green bonds totaling $16.5 billion were issued in this period, with Chinese bond issuance accounting for about half of that amount. The issuance of green bonds in 2015 topped $41 billion, and the total has grown each year since 2008, when the World Bank issued the first green bond. In February 2016, Moody’s estimated that total green bond issuance in 2016 could exceed $50 billion. Many took note of a $1.5 billion green bond tranche in a global bond offering by Apple on February 16, 2016. Noting this “auspicious” issuance, Standard & Poor’s (S&P) recently issued a report projecting corporate green bond issuance of between $15 and $28 billion in 2016. Even the low end of that range would double 2015’s $9.6 billion. As described below, S&P notes in its report that recent green bonds reflect investor interest in increased levels of disclosure and environmental credentials for green bonds.

Useful resources include the World Bank primer on green bonds and Moody’s Green Bond Assessment Methodology, which was released in April 2016.

Responding to early concerns that the standards used by issuers for eligible or qualifying projects and other investments were too vague or could be too easily manipulated, a group of 12 investment banks adopted the voluntary Green Bond Principles (GBP) in early 2014. The GBP were updated in March 2015 and currently reflect the involvement of more than 130 issuers, investors and intermediaries active in the green bond market.

The GBP permit some flexibility with respect to restrictions on the use of green bond proceeds, and there is a developing list of both official methodologies (of various international financial institutions, or IFIs) and other methodologies for various types of green bonds, as well as a growing list of recognized third-party accreditation or validation agencies. There are also ongoing efforts to create related methodologies (for example, a draft standard for water climate bonds).

Several IFIs—including the African Development Bank (AfDB), the European Investment Bank (EIB), the International Finance Corporation (IFC) and the World Bank (IBRD)—have announced a proposal for harmonized reporting for renewable energy/energy efficiency projects that seeks to eliminate some of the non-material differences in their respective requirements.

In light of recent Chinese issuance volumes, it is significant that the People’s Bank of China has adopted its own green financial bond rules (an unauthorized translation is available).

S&P has also prepared an analysis and graphic description of 2014-15 corporate green bond issuance showing respective issuer geography and industry.

While the GBP are generally viewed as responsive to investor concerns, some investors have requested that issuers and intermediaries go further than the GBP and have highlighted the following four key issues for additional attention:

  1. Eligibility criteria for green projects
  2. Initial disclosures and intended use of proceeds
  3. Reporting on use of proceeds and project impacts/benefits
  4. Independent assurance

S&P’s report acknowledges that it is unclear how investors evaluate green bonds or whether there is any particular pricing advantage to them. However (and citing the example of the opportunity for US utilities to tap investors who would usually be uninterested in their bonds), S&P notes that green bonds may diversify the investor universe for an issuer’s bonds. While S&P notes anecdotal reports of a 2-3 basis-point tightening for a European green bond, it also notes that this is not evident in the US where green bonds tend to trade in line with non-green bonds.

Unfortunately, while showing impressive growth in a relatively short period, total green bond issuance is a fraction of the significant amount of eligible investments that are estimated to be required for various international climate change commitments and pledges. In fact, the International Energy Agency has estimated that, to meet the targets of the COP 21 agreement reached in Paris last December, a total investment of $13.5 trillion will be required by 2030. So there is plenty of room for further growth in the issuance of green bonds.

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