Green Bonds: Definition, Developments and Drivers

Jacqueline Tao Yujia, Gautam JindalESI In-house Seminar

15 April 2015

Why you should be interested in green bonds?

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2014: US$36.6 billion

Estimated Issuance:2015: US$100 billion

Green Climate Fund: $10billion

Copenhagen Accord:US$30 billion for 2010 to 2012

US$100 billion a year by 2020

2018:US$300 billion

2020:US$1 trillion

Green Bonds

• Green bonds are fixed income (debt) financial instruments that are applied exclusively towards projects with significant environmental benefits

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T0: Bond issuer receives principal

T1 to TMaturity: Bond issuer pays coupon on the bond at pre-determined intervals

TMaturity: Bond issuer repays principal

Standard bonds vs. green bonds •Bonus feature of “green” – positive environmental outcomes•Flat pricing of green bonds to conventional bonds •Pari passu applies

Labelled and Unlabeled green bonds

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Labelling process acts a discovery tool for investors.Additional costs compensated by potential new investors and green reputation enhancement

Total green bond universe: US$502.6 billion

Green Bond Issuers

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Ensuring Financial IntegrityType of Green Bond Definition

Green Use of Proceeds Bond

A standard recourse to the issuer debt obligation for which the proceeds shall be ring-fenced to green projects.

Green Use of Proceeds Revenue Bond

A non-recourse to the issuer debt obligation in which the credit exposure in the bond is pledged cash flows of the revenue streams, fees, taxes, etc. and the Use of proceeds of the bond goes to related or unrelated green projects.

Green Project Bond A project bond for a single or multiple Green projects for which the investor has direct exposure to the risk of the projects with or without potential recourse to the issuer.

Green Securitized Bond

A bond collateralized by one or more specific projects, including but not limited to covered bonds, Asset backed securities and other structures. The first source of repayment is generally the cash flows of the assets.

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Ensuring Environmental Integrity

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Development of Green Bonds

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Stage 1: Financial Innovation driven by investor demand• Investor Demand driven by socio-economic factors▫ Increasing socially responsible investors▫Climate change awareness▫Shifts in the financial markets

• Financial innovation facilitated creation of new instrument• Supply met by credible issuers creating market for investment

grade products

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Stage 2: Building market depth and width • Favorable market conditions fuelled demand and broadened

investor base▫Conventional investors disproportionately affected

• Media and publicity prompted both demand and supply reactions

• Diversification of bond issuing parties

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Stage 3: MRV and Quality Assurance• Introduction of voluntary standards and protocols to instil

regulation and discipline▫Green Bond Principles▫Green Bond Standards and Certification

• Provision of MRV services to support market development emerges▫ Increase in independent auditor organizations

• Investor demand unhampered by lack of strong definition

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Stage 4: Market Standardization and Scalability• Continued revision of MRV guidelines in response to various

stakeholders▫ Involvement of ICMA as advisory of GBP▫Building technical expertise at Green Bond Standards and

Certification• Expansion of available financial services▫Creation of Green Indices▫ Introduction of dedicated green bond funds

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Drivers of Green Bonds

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Asian experience

• Initial stage: Financial Innovation stage• Potential demand signaled by strong demand for recent

issuances• SSAs benchmark issuances are priming the market, with

various corporate issuances testing the waters• Interest (limited?) from financial intermediaries• Policy directives to build green bonds market▫ Indonesia▫China▫ India

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Current Challenges

International Asia• Delicate balance between

leniency and stringency• Environmental attribute

(definitive or relative) characteristic

• Lacklustre secondary market performance an area of concern

• Sourcing for demand (international and domestic)

• Ensure pipeline of high-quality supply/projects

• Developing MRV expertise• Role of policymakers

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Future Outlook

• International outlook▫Continued growth▫Building market depth and width (homogenous issuances)▫ Increasing bond issuances from emerging economies▫US$100 billion?

• Regional outlook▫Policy-heavy move towards mobilizing green bonds▫Continued market leadership from SSAs▫Potential financial sector issuances

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Thank you!

Energy Studies Institute 29 Heng Mui Keng Terrace Block A, #10-01 Singapore 119620

Jacqueline TaoTel: (65) 6516 6692Email: esity@nus.edu.sg

Roadmap of Green Bond Markets in Asia

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ASEAN financial market development-ASEAN+3 Bond Market Initiative-Intra-ASEAN capital mobility