Green bonds - by Nicholas Pfaff In 2008, the World Bank launched its Strategic Framework for Development and Climate Change to help stimulate and coordinate public and private sector activity in this area. In 2008, as a practical outcome of this strategy the World Bank issued a SEK2.7 billion bond thereby launching the GB market. The World Bank has subsequently continued actively to support this innovation and remains the largest issuer in the market with more than $4 billion raised as of August 2013. Other key multilateral institutions such as the European Investment Bank, the International Finance Corporation, the European Bank for Reconstruction and Development, and most recently the African Development Bank have followed suit contributing to an outstanding pool of GBs from multilaterals estimated in mid-2013 at $7.4 billion.

1. 33
Primary Markets
Issue 32 | First Quarter 2014
www.icmagroup.org
Green bonds
by Nicholas Pfaff
ICMA aims to play an active role in providing advice and support
to ongoing efforts to underpin the growth of the Green Bond (GB)
market by ensuring continuing good practice. A GB is generally
defined as one where the issuer declares the proceeds will be
used for the reduction of CO2 emissions and/or environmental
sustainability purposes.
In 2008, the World Bank launched its Strategic Framework
for Development and Climate Change to help stimulate and
coordinate public and private sector activity in this area. In 2008,
as a practical outcome of this strategy the World Bank issued
a SEK2.7 billion bond thereby launching the GB market. The
World Bank has subsequently continued actively to support
this innovation and remains the largest issuer in the market
with more than $4 billion raised as of August 2013. Other key
multilateral institutions such as the European Investment Bank,
the International Finance Corporation, the European Bank
for Reconstruction and Development, and most recently the
African Development Bank have followed suit contributing to an
outstanding pool of GBs from multilaterals estimated in mid-2013
at $7.4 billion.
As the market has developed, investors focused on
understanding the underlying environmental projects and their
impact have been able to seek guidance from third parties
providing certification, evaluation and rating services (amongst
others CICERO, the Climate Bonds Initiative, Sustainalytics and
Vigeo). Other types of issuers have also joined the GB market
in the wake of the multilaterals. They are, for example, regional
and local authorities such as Région Ile de France and the
Commonwealth of Massachusetts. More recently, banks (Bank of
America Merrill Lynch) and corporations (Vasakronan, EDF) have
also entered the market. EDF’s GB at €1.4 billion is the largest
from these new issuers and is exclusively dedicated to financing
future renewable energy projects led by EDF Energies Nouvelles,
a wholly-owned subsidiary. These developments illustrate the
growing diversity of issuers beyond multilaterals and their core
investor base for GBs. It also creates new challenges.
Indeed, GB issuers typically make a number of representations
to investors with respect amongst others to use of proceeds
and reporting. In the case of multilaterals, such representations
and resulting obligations are backed up by the modus operandi,
budget, legal set-up and public sector ownership of these
institutions. For private sector banks and corporates, GB issues
involve specific undertakings over time that need to be clearly
understood by all parties involved in the transaction. As a result,
there has been a perception from a number of key GB issuers
and intermediaries that the market’s growth requires further
guidance on good practice and standardisation.
In this respect, the World Bank has been active in bringing
together issuers, intermediaries and investors to discuss these
topics and possible guidelines. Similarly a group of major
underwriters, the Green Bond Steering Committee (GBSC), have
been working on a market initiative the Framework for Green
Bonds that was originally published in a Euroweek supplement
last October. The Framework aims to “maintain the integrity” of
the GB market for the benefit of issuers and investors alike, and
to bring together generally all parties involved in the market. It is
a set of voluntary guidelines that will allow market participants
to “communicate about the characteristics of any given Green
Bond”. It addresses key points such as definitions of different
categories of Green Bond, as well as use and management of
proceeds, certification and reporting.
ICMA is involved in these discussions both directly and through
its relevant committees. It wishes to contribute as much as
possible to standardisation and good market practice in the GB
market, and aims to support the institutionalisation of ongoing
initiatives in this direction.
Contact: Nicholas Pfaff
nicholas.pfaff@icmagroup.org