What is a green bond and why does it work?

What is a green bond and why does it work?
The answer helps explain why YTD issuance is triple that of full year 2013!
The Green Bonds market continues to expand with vigour. Indeed, total issuance year to date
is already at USD 32 bn according to data from Climate Bonds Initiative. This is about three
times as much as during the whole of
2013 when market expansion took off
in earnest. This brings total,
cumulative, issuance to above USD 50
bn. Admittedly, this is still modest in
relation both to other, mature parts of
the global bond market and to the
massive need of financing to realise
the climate related investments
necessary to meet the two-degreestarget. It is, however, indisputably a
strong start and judging by our pipeline and indications from other, the market is set to continue its stellar expansion. In the
following, we seek to answer why more issuers and more investors are getting engaged.
WHAT IS A GREEN BOND AND WHY DOES IT WORK? Various stakeholders are showing a
constantly rising interest in Green Bonds. This is still a young market where standards and
procedures are being developed. A key challenge has been to identify and share the values of
a Green Bond - what purpose does it have and how does it provide business value for the
stakeholders involved? Read more below.
22 OCTOBER 2014
SEB Green Bonds
[email protected]
Christopher Flensborg
+46 8 506 231 38
Mats Olausson
+46 8 506 232 62
Samantha Sutcliffe
+46 8 506 232 56
Johanna Cavallin
+46 8 506 230 13
SEB Green Bonds
homepage: here.
to The Green Bond by
sending an e-mail to:
[email protected]
HOW GREEN IS YOUR BOND? In this article, Christa Clapp from CICERO argues that Green
bonds are a promising new trend in the bond market – but the environmental foundation
needs to be solid for the market to realize its full potential. The most critical challenge that
the growing green bonds market faces is environmental integrity. Read more on p3.
The financial principle of a Green Bond is very simple it is just a bond like any other. The lender takes the
same credit risk on the borrower’s repayment
capability as in the case of a regular bond and, hence,
if the price of the Green Bond is in line with the price
where the issuer normally gets their funding, the
risk/return will be in line with “regular” bonds.
Importantly, this implies that a Green Bond can be
bought by any investor with a fiduciary mandate who
otherwise would be able to take risk on the issuer.
Where the Green Bond changes its character from a
“regular” bond is, firstly, in the specification of how
Important: Your attention is drawn to the statement on the back of this report which affects your rights
the proceeds shall be used - namely for climate
related financing – and, secondly, in transparency and
The birth and the growth of the Green Bond market
has, like any other new development, presented a
number of challenges. The single most important
challenge has been to identify and share the values of
a Green Bond - what purpose does it have and how
does it provide business value for the stakeholders
involved? So how have we approached that?
In the way we validate mandates and communicate
performance in financial markets we have created a
system where most values are explained by numbers
The Green Bond
and consequently performance needs to be
quantifiable. However, when we talk about transitions
on a larger scale – such as finding financial resources
to alleviate climate stress - we need to change the
financial infrastructure and organizations to facilitate
the transition. Organisations need to appreciate the
new goals and the infrastructure needs to be able to
identify and support the new objectives. There are
various ways to do this but the most efficient is to
leverage existing infrastructure.
Hence, the nature of the Green Bond is to enable
mainstream fixed income mandates to engage and
access climate finance. The strength is that it is
enabling and engaging traditional bond mandates for
climate finance, and thereby activates new pockets of
money for Green investments. So we see the main
purpose of the Green Bond is to be used as an
instrument for business leaders to transform their
organizations to be more comprehensive and address
society challenges through their existing
The business value is found through the participation
in this transition, understanding why it happens and
where it goes, identifying systemic and business stress
factors and being well prepared for new valuations.
There’s been a big debate about standards; does one
size fit all, how dynamic shall these standards be, who
will decide and what is their credibility and
motivation? And most importantly, why do we need
the standards, what are they good for? Let’s start with
the last question since it will be difficult to create
standards without a defined goal.
When looking at standards the key element will be
framing the market in respect to rules and procedures.
When that is done, various stakeholder groups can
use these frameworks to create their own universe of
Green Bonds. Some will be very green, some will be
light green, some will target mainstream mandates,
some will target dedicated Green mandates. There
will, like in all other markets, be a mainstream solution
and a specialist solution, each with their own
The first step towards creating these rules and
procedures has already been taken in the form of the
Green Bond Principles which were created by 13 banks
of which SEB was one, in January this year. The Green
Bond Principles create a common starting point and
this will continuously be supervised and followed up
by the Green Bond Principle Governance and the
secretariat operated by the International Capital
Markets Association, ICMA. This initiative has the
potential to create and lead the market development
of rules and procedures for Green Bonds.
The privileges we have through our work with various
blue chip organizations have taught us that the
challenges are not alike. For instance, in Germany
institutions like KfW work on multiple tasks to address
climate protection and the energy transition, in
Holland NWB and the water authorities work on
managing water levels. In Africa, Korea, Canada,
Norway and many other places, regional leaders like
AfDB, KEXIM, EDC and KBN work with their individual
challenges and on a global level the UN and the World
Bank Group work in an ever changing environment to
aggregate knowledge and to find and share solutions
to climate stress. So, no, one size doesn't fit all!!
Another important issue is that of what is Green and
how do we define the assets that can be financed by
Green Bonds? Is it up to banks and bureaucrats to
define, is it a business decision or do we need to go to
academia and Non-Governmental Organizations for
an answer? In our opinion, this is a very simple
question - it is up to the investor to decide!
However, we need to assess how we - as a service
institution - provide a product which is not only
suitable but also valuable for our investors.
Furthermore, a scalable, uniform, broadly labelled
systemized categorization of Green is required to
allow investors to create their own strategies and for
the broader financial services sector to provide
Normally, this is done through indexes but these
indexes need to be backed by sufficient volume and a
specification of what is included.
Indexes are slowly appearing. The World Bank is doing
a tremendous job in guiding the market, leveraging
their infrastructure and long experience in market
development. Also, pioneers like SEB and CICERO (the
Norwegian climate science organization who is the
institution that has verified most Green Bond issuers’
Green bond frameworks) are working to create a
global network of academic institutions; there are
already universities from Europe, North America and
Asia in the network.
By developing this platform, we hope to be able to
create a comprehensive database which will enable
stakeholders to use the rules and procedures from the
Green Bond Principles, the guidance of the World
Bank and the context of the database to create an
individual Green universe reflecting their specific
ambitions, whether via an index or through a tailored
Lastly, we have started a close cooperation with HSBC
on a joint terminology for determining how to validate
The Green Bond
and guide new strategies and we invite other banks to
join in the dialogue.
We think this is a crucial next step in the development
of the Green Bond market. We think it is not only good
business but also a way for us and our partners to
drive the financial world towards better solutions and
provide clarity for all to develop and implement green
The section above is written by Christopher
Flensborg. The following article: “How Green is your
Bond?”, is written by Christa Clapp, Head of Climate
Finance at CICERO (Center for International Climate
and Environmental Research, Oslo). Both articles have
also been published in the October issue of
Responsible Investor Insight.
With the onset of green bonds, investors have the
opportunity to support a low-carbon and climateresilient future. To date, only a fraction of a percent of
the global bond market could be considered ‘green’ –
but if this portion continues to grow, investments in
low-carbon infrastructure can facilitate the economic
restructuring necessary to meet a 2°C climate change
Green bonds are a promising new trend in the bond
market – but the environmental foundation needs to
be solid for the market to realize its full potential. The
most critical challenge that the growing green bonds
market faces is environmental integrity.
The financial community is becoming more aware of
environmental risks to their investments. Climate
change drives more extreme weather patterns and
events that can pose a physical risk to assets (e.g.
water stress can negatively impact infrastructure
projects). Investors also face an additional policy risk:
impending climate policy could eventually result in
stranded assets that support fossil fuel infrastructure.
Both physical and policy risks can translate into real
economic impacts on investments.
Investors should have a full understanding of the
potential environmental impacts and risks on their
investments. This becomes even more important as
the green bond market shifts towards corporate
issuers. Understanding the ‘greenness’ of a bond goes
beyond transparency on what project types a bond
invests in, to disclosure of environmental risks of
investments. The possibility of a ‘headline risk’ from a
large negative environmental impact or disaster poses
a risk of share price losses to issuers and investors.
Independent environmental reviews of green bonds
provide the necessary due diligence for investors to
understand the environmental impacts of their
financial decisions. The Green Bond Principles,
developed by a consortium of investment banks, also
note that the environmental integrity of investments is
enhanced by external expert reviews.
As an independent, not-for-profit research institute,
CICERO provides environmental reviews (called
second opinions) on green bond investment
frameworks by applying high-quality climate change
research and expertise. Our researchers review the
issuing institutions' frameworks for eligible project
selection and assess the framework’s robustness in
meeting the green bond’s environmental objectives. In
doing so, we emphasise avoiding lock-ins and longterm irreversible damage to the climate. We also
emphasise the need for transparent and regular
reporting on impacts of green bond projects to
CICERO has been the leading market provider of
green bond second opinions since the market’s
inception in 2007, but we recognize the need to scaleup and broaden our geographical reach as the market
evolves. CICERO recently established the Expert
Network on Second Opinions (ENSO), a global
network of trusted research institutions on climate
change and other environmental issues, covering a
range of technical expertise and regional experience.
Building on the trusted CICERO approach, ENSO will
offer a one-stop window for second opinions to the
financial market operating independently from the
financial sector and other stakeholders to preserve the
unbiased nature and high quality of second opinions.
As climate change impacts become a reality, and
transparency on environmental impacts increases,
investors should look for independent reviews as a
sign of environmental due diligence on green bonds.
Investors need full disclosure of risk before they can
make informed investment decisions. As the market
continues to grow and evolve, both investors and the
environment would benefit from a standard practice
to ensure the ‘greenness’ of bonds.
SEB Green Bonds Team
Christopher Flensborg
+46 8 506 231 38, [email protected]
Mats Olausson
+46 8 506 232 62, [email protected]
Samantha Sutcliffe
+46 8 506 232 56, [email protected]
Johanna Cavallin
+46 8 506 230 13, [email protected]
The Green Bond
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