IFR Green Bonds Roundtable 2015

IFR: For issuers who don’t follow through with their green intentions, what is the sanction? Let’s say issuer X says: ‘we are going to do Y with our green bond proceeds’; they get a second opinion and we all think ‘fine’ but then six months or a year later there haven’t been any disbursements consistent with the stated use of proceeds. What needs to happen? At the end of the day, I understand the market needs to carry on growing fast to hit that US$100bn target but in order to cement the market do we need to have some sort of green event, such as exclusion from a green index or something where the index providers take responsibility and sanction an issuer for not meeting stated intentions by kicking them out of the index thereby creating a flow of forced sellers? Tanguy Claquin, CA-CIB: That’s an interesting point. There is no universally recognised gatekeeper of this market right now. There are second opinion-providers but they have different views. That’s one angle. And there are certainly the investors, but as Ulrik mentioned, they’re not real gatekeepers in that you can sell a trade to investors who don’t care about green aspects. You have the index providers. They’re another aspect. We also have NGOs and organisations such as Climate Bonds Initiative playing a role; we may see others in the future. Market observers like Thomson Reuters may be one of them too. And then there are banks: we are all worried about this, and clearly, we will not bring a trade that we don’t think is good for our reputations. That’s why we drafted the Green Bond principles although we have taken the view that we should not dictate what is green and not green because we cannot go that far. In the medium-term, governments or local regulators may put some incentives into their own markets and decide what they think is green and not green, but here again we will see different views. The Chinese are certainly different from the Europeans who are different from the US. One element for 2015 will be: who is going to emerge as gatekeepers of this market? Navindu Katugampola, Morgan Stanley: Bringing together some of your questions here, Keith, around mixed use of proceeds bonds, pricing and sanctions if you go off track. First of all, there’s nothing wrong with mixed-use bonds. The development bank bonds have multiple asset classes within them around adaptation and mitigation strategies for example. To Pernille’s point, if those asset classes don’t have credibility, however, if they could be considered non-green or are a much darker shade, that’s where you as an issuer start to lose your credibility. If you fail to meet the objectives you set out with, in respect to your investments in Green Bond eligible assets, you lose your credibility. And fundamentally, that’s what it boils down to: credibility. When we’re talking to potential issuers of Green Bonds, the first thing they’re concerned about is not necessarily what positive PR they can generate but what the downsides are they need to be aware of, and what the potential pitfalls are. So in the same way as investors aren’t at the moment being asked to pay a premium for Green Bonds – the credit they’re taking is a corporate credit – the ultimate sanction on a company is their credibility as a Green Bond issuer and how investors respond to that. IFR: OK so you have issuers like GDF Suez, EDF, Unilever etc that are coming up with green bonds; they’re expanding the market, diversifying their investor base into ESG/SRI money, which is all fine. But I just want to focus on the issue of hard ring fencing of revenues. So you say the proceeds of a new issue go towards some renewable project or some climate change mitigation project but ultimately, what the company is not saying to investors is you’ll be paid from the proceeds of that portion of our revenue. Do you think that issuers, investors, the market need to take a stance on this and say: ‘look, we’re very happy to fund this part of your business but to supe

IFR: Is there scope for second-opinion arbitrage, given how many second-opinion providers there are now. Do you need to have standards in your industry? Pernille Holtedahl, DNV GL: First of all, we all have slightly different approaches, I spoke to an investor the other day who told me she’d also spoken to the other opinion providers and said: ‘what you say is very much in line with what they say’. In terms of how I present our approach compared to other opinion providers, at least we generally agree about how we differ, and I think it’s up to the issuer and the investors who they want to work with. Maybe our approaches will start to look more and more alike over time because investors may start to agree increasingly on what they’d like to see in an opinion. I wouldn’t go down the standardisation route. It should be the issuer or the investor to say: “I don’t like this approach so I’m not going to buy a bond if you’re going to use that opinion provider”. I don’t think that’s the case today, but I’d much rather see competition [between us] create the best possible product than regulation. Mike Wilkins, S&P: This resonates quite strongly with us as a credit rating agency because we’ve seen some of the themes here in terms of second opinions, arbitrage and so on applied to credit ratings. A couple of things to state: obviously when we look at Green Bonds what we are looking at as a credit rating agency is essentially as it says on the tin, the credit, When we issue a rating on a Green Bond we are not assessing the “greenness” of that bond at all, we are assessing its ability to repay on time and in full. That’s essentially all we can do as a regulated entity ourselves, we are not permitted to give an opinion on the greenness of a bond. So that’s got to be clearly stated, obviously there are discussions about what more we can do in this market and there may be opportunities to develop in this way, because it seems to be an investor requirement in this area. But we are not providing environmental integrity opinions, we are looking at the creditworthiness of the market as it currently stands. This really begs the question of how the market is going to evolve going forward because environmental integrity has not necessarily been seen as an investment benchmark as yet. What I mean by that is that it’s not affecting pricing. Whereas a credit rating will affect the pricing of a bond, will a second-opinion provider and label whatever it may be given to that bond affect the pricing? When we get to that level of the evolution of the Green Bond market, then we’ll start to see quite a fundamental shift in dynamics in how it develops. The other thing I would mention related to the evolution of the market is the issue of risk transfer. At the moment the corporate Green Bond market growing as it is – and it’s growing at a phenomenal pace – is essentially a market in green-labelled thematic bonds; there’s no risk transfer in terms of credit risk. Going forward, we anticipate that’s going to happen more i.e. where repayment of the bonds will be linked to the green assets which the bond proceeds are financing and that’s where credit rating agencies like S&P will come in. I come from a project finance background and we have a very well established and comprehensive methodology for looking at project finance risk. That’s what investors will be looking at when they look at the risk transfer issue on Green Bonds, whether for renewable energy or energy efficiency, whatever it may be. IFR: I wanted to touch on Green project bonds. The project bond market globally is pretty small relative to the amount of assets financed through the bank market, and the bond market has encountered pretty formidable problems in getting its head around project risk it. Will non-recourse structures catch on in the Green Bond market because ultimately non-recourse green projects are as pure-play as you can get. Is credit and the prospect of non investment-grade ratin

IFR: Good morning and welcome to this IFR roundtable on Green Bonds. Green Bonds have been among the most exciting developments in DCM for some considerable time. The market flourished in 2014, reaching close to US$40bn in new issuance. Beyond primary volumes, the market’s ecosystem also evolved apace, the issuer base broadened and the investor base deepened. The market’s forecasts for 2015 outstandings is around US$100bn. I’ll be curious to pursue the feasibility of hitting that number. Of course, beyond the development finance institutions and multilaterals that built the market, issuers now include regional issuers, provinces, cities and municipalities, renewable energy companies, industrials, banks and real estate companies as well as utilities. In terms of issuer profile and structure we’ve seen issuance across investment-grade, high yield, convertibles, ABS, private placements, project bonds, mini-bonds; and the buyers have been institutional, high net worth and retail. Ulrik, can you take us through how we morphed from an interesting supranational marketplace into today’s dynamic global marketplace for Green Bonds? Ulrik Ross, HSBC: We’ve been on a journey since 2007/2008. At that time it was a local currency niche market focused on retail investors. It was kick-started by the supranationals, which had very strong mission statements to fulfil environmental purposes within their loan programmes and it was very natural for them to embed strong environmental governance structures into their loan allocation and loan scrutiny processes. So for them to become market leaders and try to develop product that reflected their core values was key but it also came quite naturally. The supranationals developed a strategy that was driven very much by price efficiencies reflecting on their core values. Then in 2012-13 the World Bank started to align its environmental loan framework with their capital markets activities and, together with the IFC, came up with a sustainability financing foundation. That morphed into what we see as the framework for the Green Bond principles today. Since we saw the first benchmark offerings in the Green Bond space by the IFC, investors have recognised a huge opportunity to invest in liquid assets that offer the same yields as conventional bonds. As an investor with a fiduciary mandate, you don’t have to give up anything on that side; it’s an efficient investment for you but it’s also a value-driven investment at the same time where you actually get something extra to your normal bond offerings i.e. you can show to your stakeholders, your shareholders, investors in your funds that you are doing something much more than generating return on your assets. As more funds started to engage in environmental investments and set up dedicated investment policies, we grew the issuance volume across sectors and formats helped by the introduction of a framework and guidelines for how to do these things. The Green Bond Principles were arranged and we saw the first major corporates successfully come to the market. The framework evolved over time and you’ve lately seen financial institutions issue green bonds as well – these have been less frequent to-date so we would definitely welcome a lot more financials to participate in the market. IFR: Tanguy when corporates first started to come to the markets this year, there was a lot of scepticism with claims of green-washing and green bonds being a marketing gimmick used by corporates trying to reinvent their image? How do you respond to that, especially bearing in mind many of the corporate issuers don’t have particularly green track records? Tanguy Claquin, CA-CIB: You go straight to the tough questions. By way of background, the first corporate that tapped the public market in size was EDF in November 2013, so the market has been open to companies for over a year. The dynamic is a bit different in the SSA space, where Green Bonds have now become part of the normal funding

Tomas J LundquistCitigroupTomas Lundquist is head of European corporate DCM origination at Citigroup, responsible for origination, structuring, and execution of deals in international DCM. Lundquist joined Salomon Brothers in 1996 and spent his initial four years in the fixed-income new products group in New York. He has spent the last 15 years in the London office, where he has executed numerous transactions across sterling, euro and US dollars as well as strategic buybacks, hybrid capital financings and private placements. Mirko GerholdCommerzbankMirko Gerhold is head of hybrid capital and liability management within Commerzbank’s DCM Bonds Solutions and leads the bank’s DCM efforts in the green bond market. He has over 15 years of experience in bond origination and structuring. Commerzbank is a member of the Green Bond Principles and has recently acted as a lead manager on various green bond transactions. Gerhold holds a master of applied sciences in Banking and Finance from Frankfurt School of Finance & Management. Tanguy ClaquinCredit AgricoleTanguy Claquin founded and manages the Sustainable Banking team at Credit Agricole CIB. The team focuses on transactions targeting both financial objectives and positive social and environmental impacts in all asset classes. In the past four years, CA-CIB has arranged more than 50 green and sustainability bonds. The team has also advised on impact investment funds (carbon funds, microfinance, private equity) and agriculture risk management instruments. Stefen ReinerDeutsche BankStefan Reiner is a director at Deutsche Bank in the Capital Markets and Treasury Solutions (CMTS) division and he looks after German financial institutions. He joined Deutsche Bank in 1999 and has covered corporations, the public sector and SSA clients in London. Prior to joining Deutsche Bank, Reiner worked at Credit Suisse as head of new issues in Germany. Pernille HoltedahlDNV GLPernille Holtedahl is principal consultant and project director at DNV GL. She is a PhD economist with 20 years of international experience in the areas of energy, environment and climate change. Areas of expertise include policy and strategy advice, project implementation and evaluation, and due diligence of projects. Holtedahl has worked in the field of green bonds for three years and has led DNV GL’s efforts as an active participant in the market, including supporting pioneering issuance. Ulrik RossHSBCUlrik Ross is global head of public sector and sustainable financing at HSBC, managing all financing and capital market-related solutions for public sector clients for high-grade and emerging markets clients across bonds and loans, more bespoke financing solutions, liability management and capital solutions. He also has overall responsibility for the development of the bank’s sustainable financing franchise. He is a member of ICMA’s Executive Committee for the Green Bond Principles. Navindu KatugampolaMorgan StanleyNavindu Katugampola is head of green bond origination at Morgan Stanley. He joined the firm in 2004, initially covering UK corporates for debt and derivatives, and subsequently moved to the Sovereign, Supranational and Agency team to focus on SSA origination and derivatives in 2009. Since 2012, he has also been leading Morgan Stanley’s green bond structuring and origination efforts, across public sector, corporate and financial clients. Mike WilkinsS&PMichael Wilkins is a managing director of the infrastructure finance ratings group of Standard & Poor’s based in London where he has global responsibility for the firm’s infrastructure and environmental finance research. Wilkins’ experience at S&P includes seven years as head of infrastructure finance ratings, the analytical group within S&P which covers utilities, project finance, PPPs and transportation in EMEA. He was also co-head of the corporate securitisation group.  Keith MullinIFR To see the digital version of this roundtable, please click here.