November 17, 2020/EBRD
By Dan Storey
Green bond markets have expanded rapidly in recent years, growing sevenfold since 2014 to reach USD 257.5 billion in 2019. They are increasingly the focal point of policymakers, investors and issuers looking to attract a deeper and more diversified investor base, while developing and communicating their green growth strategies.
The EBRD, an experienced issuer and investor, has been active in the green bond markets for over a decade.
- Why issue a green bond?
Issuing green bonds can bring many benefits, including cheaper finance. However, it is important that issuers do not issue only because they expect cheaper finance. While oversubscription rates for well-structured green bonds are consistently high and some issuers experience a pricing benefit over conventional bonds, evidence across the market as a whole is inconclusive.
Which is why you need to consider the other potential benefits. Clearly identifying the priorities for your organisation will inform many of the decisions made throughout the process. Common reasons issuers choose to issue include:
- Broadening the investor base – 98% of green bond issuers responding to a recent survey confirmed that their green bonds attracted new investors.
- Attracting buy-and-hold investors
- Improving climate governance
- Preparing for future legislation, for example, mandatory climate-related disclosures
- Enhancing reputation for environmental responsibility
- Potential pricing benefits
For many issuers, the chance to improve their climate governance is a major attraction of issuing green bonds. Systems developed in the process of issuance can increase your understanding of how your organisation could be affected by changing policies and weather patterns, support pre-compliance with upcoming regulation and help mainstream climate into organisational strategy.
- Are your activities green enough?
A broad range of activities is eligible for financing or refinancing from green bonds including projects in energy-intensive and high-emitting industries. It may be simplest, however, to begin with those that are most easily identifiable as green. These can include renewable energy or buildings with third party certification from organisations such as LEED and BREEAM that provide assurance to investors that they meet certain energy performance standards.
That said, green bond investors are keen on corporate issuance from a broader range of corporates provided that the activities to be financed have strong green credentials. In a recent survey of European investors, 93% of respondents nominated corporate issuance as one of their preferred green bond investment channels, with industrials, energy and utilities, consumer discretionary, and materials the top sectors of interest.
Guidance on eligible activities can be found in the market standards that most green bond investors expect green bonds to adhere to, including ICMA’s Green Bond Principles, guidance from Climate Bonds Initiative, and the EU green bond standards to be developed based on the EU taxonomy.
If you are from a country where the EBRD works and are considering issuing your first green bond, then get in touch. The EBRD can provide technical assistance through third parties to ensure your issuance adheres to best market practices and to support you to identify green assets, and develop the systems and processes to track, monitor and report on them.
- Do green bonds fit your funding needs?
The decision to issue green bonds transcends an organisation’s overall funding strategy. However, understanding their place within it is crucial. To do that, you will need to consider:
- Where would potential green bond issuance fit within your organisation’s debt profile?
- Do eligible assets and activities allow for issuing a sufficiently large bond or a series of green bonds?
- Are the funding needs in local or hard currency? Most international investors would prefer hard currency so how can any potential FX mismatch be managed?
- Does your institution have a credit rating? What type of credit profile are green bond investors looking for?
- Which new and existing domestic and international investors will green bonds target? How will you market it to them? How will you meet investor expectations of transparency?
- What kind of bond (e.g. senior unsecured, green project bond, or sukuk) best matches the bond’s underlying activities, organisational financing needs, and investor appetites?
- Will the green bond be a private placement or a public offering and will it aim to meet criteria for inclusion on a publically listed green bond index in order to increase visibility?
- Does the issuance need a cornerstone investor? Is one available?
- How much does issuance cost?
Concerns about the costs of issuing a green bond sometimes deter potential issuers. These costs are mostly counted in time and effort – particularly for a first green bond issuance – and can vary depending on an issuers’ level of experience, markets and sectors of operation. Costs are lower for subsequent green bonds. One of the reasons why, in a recent survey of treasurers from regular green bond issuers, 90% said the costs of issuing green bonds were similar or less than conventional bonds.
Green bonds will require your organisation to appoint third parties to fill the same roles as with a standard bond. For instance, appointing an experienced bank as bookrunner or underwriter familiar with your targeted investors is just as important as in conventional issuance.
Green bonds also, however, require an issuer to complete other specific tasks. They include:
- Identifying eligible projects and preparing transparent selection criteria
- Linking the green assets to the larger strategy and governance of the institution
- Setting up monitoring systems to report on the use of proceeds and environmental benefits
In addition, issuers are strongly advised to have an external reviewer assess their proposed green bond framework to ensure it qualifies as ‘green’.
In short, issuing your first green bond involves some careful preparation. However, many of the questions and systems need only be answered and developed once. Costs for issuing subsequent green bonds will be considerably lower.
- Who will manage your issuance?
Green bond issuance requires internal collaboration across departments, typically combining the expertise of the legal and treasury departments who usually manage an organisation’s bond issuances with banking, corporate finance, environment and accountancy teams who have the expertise to identify and tag the range of eligible projects. Appointing a central coordinator and making it clear which teams are responsible for different tasks will ensure things go smoothly.