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Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix, and with the Disclaimer, which forms part of it.

Play interview withMichael Ridley

Fixed IncomeCredit

October 2019By: Michael Ridley and Dominic Kini

Funding Future CitiesThe growing role of green bonds

Green bond supply to fund future cities is rising rapidly…

…due to urbanisation, decarbonisation and rising adaptation spend

The trend is being driven by sub-sovereigns and real estate firms

1

Fixed Income ● Credit October 2019

Green city bonds

Source: Bloomberg, Dealogic, Moody’s, United Nations, HSBC calculations

Year-to-date issuance by sector (USD)*

Green bond supply to fund future cities is rising ...

2019

9.8bn

2018

Data as of 14 October 2019

*excluding US municipal

green bond supply

7.9bn

2019

11.9bn

2018

5.4bn

Sub-sovereign (cities, regions, provinces) green bond supply Private real estate green bond supply

Mega-cities

Over half of the world’s

rising population now live

in cities. This is estimated

to rise to 68% by 2050

Real estate and REIT green bond issuance,

by year (USDbn)

Real estate and REIT green bonds outstanding

by country/region (USDbn)

500 kg

Renewables

60 kg

Energy efficiency

175 kg

Clean transport

5 kg

Green buildings

2.71.4

2.5

4.45.4

8.4

11.2

2014 2015 2016 2017 2018

ytd

2018 2019

ytd

US Sweden Mainland

China

France Japan Hong

Kong

Other

8.3

7.1

5.2

3.7

1.6 1.2 1.3

... increasingly so from real estate firms ...

Carbon emission reduction in kg CO2 per USD1,000 bond outstanding per annum, by project type

... however city green bonds may entail less upside than renewable energy green bonds

Fixed Income ● Credit October 2019

2

Green city bonds 1

Executive summary 3

Cities under pressure 6

Bond market is innovating 8

Evaluating city green bonds 10

Credit impact of city green bonds 10

Environmental impact of city green bonds 11

Key green city bonds 13

Appendices 16

Disclosure appendix 18

Disclaimer 20

Contents

3

Fixed Income ● Credit October 2019

Green, social and sustainability bond supply by sub-sovereigns and real estate firms is rising

sharply, up 63.4% in YTD2019 versus YTD 2018 (Figure 1). Sub-sovereigns are issuing these

bonds to fund a range of public transit, green building and climate change resiliency projects.

Real estate developers tend to focus more specifically on green buildings.

We first wrote about this trend in Green Bonds and the City: Funding climate-smart cities,

17 August 2017. And the trend continues undiminished.

YTD 2019 sub-sovereign (city, region and province) green bond supply has grown at 23.6%

versus the same period last year. And private real estate green bond supply in YTD 2019 has

more than doubled over the same period in 2018. City green bonds make up 10.5% of the

overall market for green, social and sustainability bonds in YTD 2019, up slightly from 10.4% in

the same period in 20181.

Figure 1. Green, social and sustainability bond supply by sub-sovereign and real estate firms (excluding US municipal green bond supply)

Issuer type 2019ytd issuance (USDm)

Growth (% yoy) Percentage of total 2019ytd iss. (%)

2018ytd issuance (USDm)

Percentage of total 2018ytd iss. (%)

Sub-sovereign 9,864 23.6 4.7 7,979 6.2 Private real estate 11,935 122.6 5.7 5,362 4.2 Total 21,799 63.4 10.5 13,341 10.4

Source: Dealogic, HSBC. Data as of 14 October 2019

We see three reasons why green bond supply to fund cities will continue to rise. First, the

globe’s population continues to rise while at the same time, a rising percentage of this

population is based in cites. The UN predicted that 68% of the world’s population will live in

urban areas by the year 2050, up from 55% at present. The UN report predicted an additional

2.5 billion people living in cities in the next thirty years, with as much as 90% of the urban

growth centred on African and Asian cities2. Significant city expenditure is required if the world

is to urbanise in a sustainable fashion.

______________________________________ 1 Our numbers may underestimate green bond expenditures in cities. We do not include US municipal green bonds. We do not include sovereign green bonds here, yet a good proportion of their proceeds are spent in cities. 2 'UN: 68% of world population will live in urban areas by 2050', 16 May 2018, Phys.Org

Executive summary

Green bond supply to fund future cities is growing rapidly, driven by

urbanisation, decarbonisation and climate change adaptation spend

Suitable investments funded by green bonds may improve the

issuers’ credit standing

But impact investors may favour green bonds funding renewable

energy or green transit, ahead of green buildings

Cities house a growing share

of the globe’s rising

population

Fixed Income ● Credit October 2019

4

Second, while most countries attempt to decarbonise their power generation sector first, virtually

all subsequent decarbonisation plans focus on cities. Any policy that involves cutting emissions

from buildings, getting people into public transport and cutting emissions from heating and

cooking, involves a focus on cities. So much decarbonisation spend will be urban; bear in mind

that Norway’s leading climate research institute CICERO (Centre for International Climate

Research, Oslo) estimated that buildings (occupancy and construction) account for over 40% of

primary energy consumption in most countries3.

Third, we expect the majority of adaptation spend will take place in cities. It makes economic

sense to fund adaptation in urban areas where populations are large and economic wealth is

concentrated. It also may be easier to recoup public expenditure in terms of tax take achieved in

urban areas4.

Two types of entity issue green city bonds

Two types of entity issue what we call green city bonds: sub-sovereigns and real estate firms.

Sub-sovereigns issue green, social or sustainability bonds to fund green buildings, public transit

and social amenities. Real estate firms issue green bonds to finance green buildings.

These two types of entity are quite different. Sub-sovereigns are public sector entities, aiming to

nurture public goods. Their credit strength is dependent on the tax take they enjoy from their

residents and local businesses, plus funds and any implicit or explicit guarantee they might

receive from the central government. By contrast, real estate developers are private sector firms

looking for private sector gains. They are wholly reliant on their rental stream or office

development profits for their business success.

Despite their differences, both sub-sovereigns and private sector real estate firms are looking to

achieve both climate change mitigation and adaptation. This sets them apart from many green

bonds which tend to focus on climate change mitigation projects, like renewable energy.

Sub-sovereign

The issuers we categorise as ‘sub-sovereigns’ tend to be made up of cities, regions and

provinces. Bear in mind that sub-sovereign issuance (green or otherwise) is not allowed in many

countries. Nevertheless, in countries where sub-sovereigns can issue, like Australia, Canada,

France, South Africa and Sweden, sub-sovereign green bond supply is rising.

Interestingly enough there are some countries in which green sub-sovereign bond supply is

taking place at more than one level. Canada is one such example (see ‘Key green city bonds’

below). Indeed in France, cities, regions and the sovereign itself have issued green bonds. We

regard this as a positive thing, given the synergies and mutually enforcing policies that can

develop.

Real estate

Real estate green bonds have been issued by a variety of real estate firms, including specialists

in private housing, student housing, office, retail and other commercial properties. The real

estate and REIT sector bonds focus on energy efficiency of new and existing building

developments, plus renewable energy. Firms in twelve countries have issued such bonds.

Most countries in which we see sub-sovereign green bond issuance also see real estate green

bond supply: Australia, Belgium, France, Japan, New Zealand, South Africa, Sweden,

Switzerland and the US. But not all. So far we have seen sub-sovereign green bond supply, but

no real estate green bond supply, in Argentina, Canada, German, Mexico and Spain.

______________________________________ 3 'Shades of green; best practice 2019', CICERO, 2019. 4 The Coalition for Urban Transitions estimates that while cities hold more than 50% of the world’s population, they are responsible for 80% of global GDP and 75% of global CO2 emissions.

Decarbonisation of buildings,

transit and heating, to occur

in cities

Climate change adaptation

spend to take place in cities

Sub-sovereigns, real estate

firm issuing green city bonds

5

Fixed Income ● Credit October 2019

Figure 2. Real estate and REIT green bond issuance, by year

Figure 3. Real estate and REIT green bonds outstanding, by country / region

Source: HSBC calculations, Bloomberg. Excludes munis. Source: HSBC calculations, Bloomberg. Excludes munis. China refers to mainland China.

Credit impact of green city bonds

We think that the environmental spend undertaken by sub-sovereigns and real estate firms via

their green bonds can at the margin help their credit strengths. Developers that invest in energy

efficient building might be able to lower their tenants’ fuel bills, attract higher quality tenants and

suffer fewer and shorter void periods. Sub-sovereigns that invest in good public transit and flood

protection may suffer less pollution, less flooding, be more attractive places to live, enjoy a

higher tax take and suffer less economic damage.

Environmental impact of green city bonds

This credit gain is important, because we think the (public) environmental gain from city green

bonds can be modest – particularly when the bonds are focussed on funding green buildings.

We think the environmental gain is less than for green bonds which are focussed on renewable

energy expenditures, for example, particularly if one focusses predominantly on CO2 emission

reduction achieved.

What is our evidence? Moody’s estimates that for each USD1,000 of a bond outstanding,

renewable energy projects achieve 500 kg of carbon emission reduction per annum, clean

transport projects 175 kg of carbon emission reduction per annum, energy efficiency 60 kg and

green buildings 5 kg of carbon emission reduction5. Also CICERO rates many green building

green bonds as medium or light green, while renewable energy green bonds tend to be rated

dark green6.

Limited green impact from bonds funding green buildings

Generally we think the more a city green bond is focussed on supporting rail transit (or even

better renewable energy) and the less it is focussed on green buildings, the larger the CO2

emission reduction is likely to be achieved. Consequently we think that impact investors may

favour green bonds funding renewable energy and public transit, ahead of green buildings.

Investors should put issuers under pressure to identify green gains

We think investors should be quite demanding in what they seek from city green bond issuers.

So with real estate green bonds, investors could ask for more than an environmental certificate

like the LEED (Leadership in Environmental Design certificate). They could in addition look for

emission reduction targets involving building specific metrics like kg CO2/m2/yr.

We present examples of important sub-sovereign and real estate green bond issues in the

section ‘Key green city bonds’ below.

______________________________________ 5 'Environmental impact and reporting vary by jurisdiction and asset class', Moody's, 4 December 2018. 6 'Shades of green: Best practice 2019', CICERO, 2019.

0

2

4

6

8

10

0

5

10

15

14 15 16 17 18ytd 18 19 Sh

are

of

tota

l iss

uan

ce (%

)

Issu

ance

(US

Db

n)

Real estate and REITs green bond issuanceAs a % of total green bond issuance (RHS)

0

2

4

6

8

10

Am

t o

uts

tan

din

g (

US

Db

n)

Green capex may boost

issuers’ credit strength

Public green benefit can be

limited, though

Fixed Income ● Credit October 2019

6

Cities are under pressure to deliver services like waste, water, heating, transport, housing and

internet connections, often to rapidly growing populations, while simultaneously having to cope

with and plan for the impacts of climate change, be they coastal sea surges, droughts or floods,

extreme heat, falling water tables, or hurricanes of increasing frequency and magnitude.

Cities that achieve the right form of urbanisation will be attractive places to live. But cities that

urbanise badly will be congested, polluted and face infrastructure stress (The Future of Cities:

Tech solutions to five urban challenges, 19 September 2018, Green Bonds and the City:

Funding climate smart cities, 4 August 2017, Going to Town: the Opportunities and challenges

from global urbanisation’, 26 April 2017).

The required expenditure is large. But this expenditure can be net positive in terms of benefits.

A report by the Coalition for Urban Transitions says that global investments to reduce urban

CO2 emissions would cost USD 1.8 trillion per year but bring returns of USD 2.8 trillion per year

by 2030 and USD 6.9 trillion per year by 2050. Up to 2050 the benefits would exceed the cost

by USD 24 trillion7. While we do not make our own estimate in this report, we have sympathy for

the argument that up-front expenditures can glean gains in later years, in terms of reduced

environmental pollution, reduced congestion and environmental resiliency.

Unfortunately there is no ‘silver bullet’ that will transform cities and make them client resilient. A

great deal of work needs to be undertaken on a number of fronts, including on buildings, public

transit, low carbon heating, low carbon construction and water and waste provision. And cities

also need to protect themselves from climate change. Most of the world’s major cities are sited

on the coast or near the mouth of major rivers. As such they will be subject to rising sea levels.

Transport and land use

To combat congestion, cities need to invest in providing affordable public transit and promote

walking and cycling. Significant investment is required if EV cars are fully to replace fossil fuel

vehicles. Planners should promote dense development: suburban sprawl makes it difficult to

build efficient rail services, as potential passengers are too dispersed to easily access the

station. Compact, mixed-use development will maximise the opportunity for urban transit.

Green buildings

A key starting point for a green building is the energy codes associated with the building. The

Leadership in Environmental Design (LEED) system originated in the US but now is global.

Country-specific schemes like BREEAM in the UK and BREEAM SE in Sweden involve earning

points from a checklist of desired building characteristics.

______________________________________ 7 ‘Climate Emergency, Urban Opportunity’, 24 Sept. 2019

Cities under pressure

A rising percentage of the world’s growing population live in cities

Cities must deliver a multitude of services to rising populations…

…while building climate change resilience

Multitude of actions needed

to transform cities

7

Fixed Income ● Credit October 2019

Cities should consider developing or adopting ambitious building energy codes. Retrofitting can

involve the installation of double or triple glazed windows and better insulation. But in addition

gas boilers can be replaced with electric heaters and smart meters can be installed to measure

energy use. Solar panels can be installed on building roofs. Excess power can be sold back to

the grid8.

Producing and transporting building materials like cement and concrete in itself creates

significant CO2 emissions, in the form of embedded carbon. Embedded carbon can be reduced

by using blended cements and concrete, materials like wood and bamboo and recycled metal or

tiles made of recycled glass.

Decarbonising heating and cooking

While public transit and green buildings form a central plank of any urban decarbonisation plan,

the next stage is likely to involve the de-carbonisation of heating and cooking. The UK’s

Committee on Climate Change argues that the UK should consider decarbonising heating and

cooking in the period 2028 to 20329. This could be achieved if households moved to electricity

rather than gas (or if the gas sector moves from natural gas to hydrogen gas). The city of

Berkeley in California has banned the use of heating fuel in most buildings from 1 January

2020. Another 50 cities in California are considering banning natural gas in new build

dwellings10.

Mainland China enters its sixth year of a clampdown on pollution to cut smog that envelops

many cities in the winter when homes and businesses raise their heating. For the smog control

zone of Beijing-Tianjin-Hebei, 27 cities will be expected to cut concentrations of PM2.5 by

between 1% and 11%, an average of 5.5% during the autumn and winter of 2019 and 202011.

Cities are collaborating

Fortunately cities are working together on these issues. The Global Covenant of Mayors for

Climate and Energy was created in 2014 to spread best-practice measures throughout its

members. Similarly, the C40 Cities initiative spreads best practice undertaken by cities around

the world on five different topics: energy and buildings; transportation and urban planning; food,

waste and water; air quality; and climate change adaptation.

______________________________________ 8 'Building urban futures: city carbon actions anchored in building codes and standards', Karen Weigert, 25 September 2018, The Chicago Council on Global Affairs. 9 ‘The Fifth Carbon Budget: The next step towards a low-carbon economy’, by Committee on Climate Change, November 2015 10 ‘Berkeley is the first City in America to ban gas from new homes’, Bloomberg, 17 July 2019 11 'China to set stricter targets for polluting cities in heating season', Reuters, 20 September 2019.

Move underway to

decarbonise heating

Fixed Income ● Credit October 2019

8

Given the high level of expenditure that is required, fortunately the bonds market has been

innovating in a way that supports the flow of finance to cities, we think. ICMA, the International

Capital Market Association, has done two or three things over the past few years that have in

our view facilitated the rise of green, social and sustainability bonds supply.

ICMA in 2014 published the green bond principles, setting out the procedures that issuers

should undertake in putting together a green bond. This opened the way for more green

bond supply.

ICMA published the Social Bond Principles and the Sustainability Bond Principles in 2017.

These documents helped define what green, social and sustainability bonds are, giving

clarity to issuers on how to prepare these bonds.

ICMA in 2018 published the report ‘Green and Social Bonds; a High-level mapping to the

sustainable development goals’). This we think did a very good job of placing the UN

Sustainable Development Goals (SDGs) at the centre of the green bond market.

Widening beyond green

ICMA we think helped widen the use of proceeds market beyond green to include social and

sustainability bonds. While green bonds fund green projects, social bonds fund social projects –

that aid one or more disadvantaged groups of people in society – while sustainability bonds

fund both green and social projects (Figure 4).

Figure 4. Schematic explaining green, social and sustainability bonds

Source: HSBC

Green bond

Sustainability bond

Social bond

Bond market is innovating

Green bond market supporting flow of funds to cities

Sustainability bond format suitable for sub-sovereign issuers

Many green and social bonds funding SDG 11: sustainable cities

ICMA made several forward

steps

9

Fixed Income ● Credit October 2019

We think that sustainability bonds in particular are attractive to sub-sovereign issuers, as this

allows them to issue bonds that fund both green and social projects. Sub-sovereigns often have

to fund a range of projects, including renewable energy, green buildings and public transport

projects.

Linking to the UN SDGS

In its June 2018 report, ICMA showed how to map from these green and social projects to the

seventeen sustainable development goals (UN SDGs)12 – Figure 5.

ICMA in this document indicates that half of the ten or more green projects that can be funded

by a green bond, and half of the six or more social projects that can be funded by a social bond,

can support UN SDG 11 – sustainable cities and communities13. According to ICMA, no other

SDG can be funded by more green or social projects types than SDG 11.

Figure 5: Linking green and social projects to the UN Sustainable Development Goals

Source: International Capital Markets Association, HSBC

______________________________________ 12 There are 17 SDGs and 169 targets to be achieved by 2030. The SDGs are a successor to the Millennium Development Goals (MDGs), which ran from 2000 to 2015. 13 https://www.un.org/sustainabledevelopment/cities/

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

GBP Category

Clean transportation

Climate change adaptation

Eco-efficient and/or circular economy adapted

products, Production technologies & processes

Energy efficiency

Environmentally sustainable management of living

natural resources and land use

Green buildings

Pollution prevention and control

Renewable energy

Sustainable water and wastewater management

Terrestrial and aquatic biodiversity conservation

SBP Category

Access to essential services

Affordable housing

Socio-economic advancement and empowerment

Affordable basic infrastructure

Food security

Employment generation

Half the sixteen green and

social projects can advance

SDG 11 – sustainable cities

Fixed Income ● Credit October 2019

10

Two types of entities issue what we call green city bonds: sub-sovereigns and real estate firms.

Sub-sovereigns are issuing green, social or sustainability bonds to fund a range of different

urban projects including green buildings, public transit, district heating, and social amenities.

Real estate firms and REITs tend only to issue green bonds (not social or sustainability) and to

do so only to fund green projects.

But of course sub-sovereigns and real estate firms are quite different in their make-up and their

credit profiles. Sub-sovereigns are public sector entities, aiming to nurture public goods. Their

credit strength is dependent on the tax take they enjoy from their residents and local

businesses, plus support they receive from central government. By contrast, real estate

developers are private sector firms looking for private sector gains. They are wholly reliant on

their rental stream or office development profits for their business success.

Despite their differences, one key similarity is that both sub-sovereigns and private sector real

estate firms are looking to achieve both climate change mitigation and adaptation, in their city

investments. This sets them apart we think from the more mainstream form of green bond which

tends to focus on climate change mitigation projects, like renewable energy.

In the report Green Bond Insights; The Temperature is Rising, 21 March 2019, we investigated

the type of green projects on average that corporate green bonds and sub-sovereign green

bonds tend to fund. Sub-sovereigns tend to fund more low carbon transport projects, more

water and more waste management projects, but less renewable energy projects, than

corporate green bonds.

Credit impact of city green bonds

Sub-sovereigns and real estate green projects can marginally improve their credits

What then do we think of their credit strengths and the environmental offering of city green

bonds? We think the environmental spend undertaken by sub-sovereigns and real estate firms

in their green bonds can at the margin help their credit strengths.

So for example, developers that invest in energy efficient buildings may lower their tenants’ fuel

bills, attract higher quality tenants and suffer fewer and shorter void periods. Sub-sovereigns

that invest in good public transit and flood protection may suffer less pollution, less flooding, be

more attractive places to live, enjoy a higher tax take and suffer less economic damage than

those that do not. Effectively these issuers are deriving a private gain (a credit improvement)

from their green expenditures.

Evaluating city green bonds

Sub-sovereigns, real estate firms issue bonds to fund future cities

Undertaking green expenditures may make them better credits

City green bonds may entail less green upside than renewable

energy green bonds

Sub-sovereigns and real

estate firms issue city green

bonds

Both aim for climate change

mitigation and adaptation

11

Fixed Income ● Credit October 2019

For this reason we tend to look favourably on sub-sovereigns and real estate firms that issue

green bonds, versus those that do not.

Environmental impact of city green bonds

Environmental gain from green building projects can be modest

This credit gain is important, because we think the (public) environmental gain from city green

bonds can be modest – particularly when the use of proceeds predominantly is spent on green

buildings. Certainly we think the environmental gain is less than for renewable energy green

bonds. This is particularly the case when we focus predominantly on CO2 emission reduction

achieved.

What evidence do we have for this? Well for a start, Moody’s estimates that for each USD1,000

of a bond outstanding, renewable energy projects achieve 500 kg of carbon emission reduction

per annum, clean transport projects achieve 175 kg of carbon emission reduction per annum,

energy efficiency achieves 60 kg and green buildings 5 kg of carbon emission reduction.

We also note for example that CICERO tends to rate most green building green bonds as

medium or light green, while renewable energy green bonds tend to be rated dark green14.

Also the CO2 emission reduction achieved by the Barclays green bond – focussed on residential

mortgages – is relatively modest (see ‘Key green city bonds’ section below).

Figure 6: Carbon emission reduction in kg, per USD1,000 bond, per annum, by project type

Source: HSBC calculations, Moody’s

City green bonds may achieve a host of other environmental benefits like a reduction in

congestion and a fall in local air pollution. But often it is difficult to quantify these benefits. Some

impact investors may be most interested in CO2 emission reduction than a range of local benefits.

That said we do like green bonds funding public transit systems, particularly in low carbon grid

countries. Once a country’s power generation sector has been decarbonised, there is a

significant environmental benefit in terms of CO2 emission reduction (and congestion reduction)

if one promotes this form of public transit, as it moves people out of cars.

Investors should be assertive

What does this prognosis mean for investors looking to take exposure in this sector?

Essentially, it means we think that investors should be quite assertive in what they seek from

green bond issuers in this space.

______________________________________ 14 'Shades of green: Best practice 2019', CICERO, 2019.

City green bonds may help

cut congestion

Fixed Income ● Credit October 2019

12

So with real estate green bonds, investors might ask for more than a certificate like a LEED

certificate. They could look for emission reduction targets. They might ask for targets to be set

out in terms of building environmental metrics like kg CO2/m2/yr.15.

We also think that investors considering city green bonds should consider the climate change risks

that bond issuers in this space face. Whenever we see entities issuing bonds to fund climate

change adaptation, we have to assume they face climate change damage risk. While it is sensible

to spend on climate change resiliency, one needs to take into account also that climate change

adaptation spend may be a sign of vulnerability to climate change damage. A key case study is

the City of Cape Town green bond (see Key green city bonds section below) 16.

Climate change modelling may increasingly be used particularly with regards to sea-front

properties, given sea level rise and more extreme weather events. We note for example that

rating agencies recently were criticised for handing out Triple A ratings to cities that are being

repeatedly hit by hurricanes17.

The integration of climate change modelling into credit work is already beginning. We first

published on water stress in 2017 (Water stress and credit: mining and power generators at risk,

27 April 2017). We note for example that Moody’s has just purchased the climate change

modelling firm Four Twenty Seven and MSCI has purchased Carbon Delta.

We regard sub-sovereign issues at a number of levels within a country, to be potentially

positive. The cities of Toronto and Ottawa both issue green bonds, and they are located within

the Province of Ontario, which also issues green bonds. We see potential synergies from multi-

level sub-sovereign green bond issuance.

______________________________________ 15 'Shades of green: Best practice 2019', CICERO, 2019. 16 Sea level rise ran at 3.2 millimetres per annum between 1992 and 2019; but from May 2014 to 2019 rose at 5 millimetres per year, according to ‘The Global Climate in 2015-2019’, World Meteorological Organisation, 23 Sept. 2019 17 'Cities threatened by climate risk still getting AAA bond ratings', Bloomberg, 2 November 2018.

Climate change modelling to

become mainstream

13

Fixed Income ● Credit October 2019

Climate change risk – City of Cape Town green bond

The City of Cape Town [CAPTWN] bond we think illustrates the importance and immediacy of

climate change damage risks to many issuers. The City of Cape Town in July 2017 issued the

ZAR1bn 10.17% of July 2027 to fund climate change strategy projects. The green bond

received a second party opinion from KPMG, a third party verification by the Climate Bonds

Initiative and a Moody’s green bond assessment score of GB1.

The bond proceeds are used to finance and refinance nine environmental projects, including

water and sanitation projects that aim to save water through reduced usage, leakage and

waste; improved sewage infrastructure, and the upgrading of seawalls to protect against

flooding; and the introduction of electric buses.

Soon after the bond was issued, however, southern Africa suffered a prolonged drought. During

the drought, Moody’s on 29 January 2018 published the note ‘Cape Town…water supply crisis

is credit negative’. Moody’s argued that the drought was negative for South African tourism and

agriculture, as a result of which the revenues for Cape Town businesses would be hit, with a

knock-on negative impact on Cape Town’s financials (‘Running dry in Cape Town: It all beings

on ‘Day Zero’, 8 February 2018).

In the end the drought broke and there was no change in the Moody’s credit rating. However,

this episode illustrates the fact that a bond issued partly to combat climate change, can be

negatively impacted by the very climate change damage it was issued to try to counter. These

risks need to be taken into account when considering the credit strength of an issuer.

Social and sustainability – Madrid

The Autonomous Community of Madrid [MADRID] has issued a social bond and three

sustainability bonds. Madrid issued a social bond in 2016, but then a sustainability bond in each

subsequent year.

In February 2018 Madrid issued the EUR1.0bn 1.773% of April 2028 sustainability bond. Madrid

declared that the 2028 bond will fund a number of sustainable development goals, specifically

SDG1 ‘no hunger’, SDG3 ‘good health and well-being for people’, SDG 4 ‘quality education’,

SDG5 ‘gender equality’, SDG9 ‘industry, innovation and infrastructure’, SDG11 ‘sustainable

cities and communities’, and SDG13 ‘climate action’. (See ‘Social and SDG Bonds, New Kids on

the Block’, 23 May 2018.)

Madrid first published a Sustainability Bond Programme, but then followed this up with a

Sustainability Financing Programme, to cover both its loan and bond programmes.

Sustainalytics produced a second party opinion on the sustainable finance framework.

Key green city bonds

We highlight key bonds by sub-sovereigns and real estate firms

City of Cape Town illustrates climate change risk

Barclays mortgage bond provides significant data

Fixed Income ● Credit October 2019

14

Deals within deals: Province of Ontario and City of Toronto

In Canada we see sub-sovereign green bond issuance both at the regional and city levels. The

Province of Ontario [ONT] issues green bonds, while at the same time both Toronto and

Ottawa, cities within Ontario, also issue green bonds.

The Province of Ontario issued its first green bond on 2 October 2014 and has four green bonds

outstanding, denominated in Canadian dollars. Ontario developed its green bond framework in

consultation with CICERO18. Eligible green projects include clean transport; energy efficiency

and conservation; clean energy and technology; forestry, agriculture and land management;

climate adaptation and resilience, as eligible green projects.

Ontario issued its most recent green bond on 31 January 2019. The bond aims to fund clean

transport projects including the Eglington Crosstown light rail transit (LRT) and the GO Rail

Expansion (formerly Regional Express Rail). Interestingly, the Eglington Crosstown light rail

transit system is located in Toronto. The GO Rail Expansion is a large rail network that passes

through Toronto.

This is interesting because the City of Toronto [TRNT] itself has two green bonds outstanding,

the CAD300m 3.2% of August 2048 and the CAD200m 2.6% of September 2039, both of which

fund ‘core and supporting infrastructure for sustainable and clean transportation’19. So both

province and city level green bonds are funding projects in the same city.

Counting carbon – Barclays Holding plc

Barclays Bank in November 2017 issued the EUR500m 0.625% of November 2023 green bond.

It was issued as a 6NC5: the bond matures six years after it was issued, and cannot be called

during the first five years. The bond is issued out of the Barclays holding company.

This green bond will finance or refinance a set of Barclays’ green mortgages. Although this

involves green mortgages, this is not a mortgaged-backed security (nor a covered bond). Bond

holders do not enjoy security over the mortgages. The Carbon Trust produced the bond’s

second party opinion.

In what sense are these mortgages green? To comply with the Climate Bond Initiative’s (CBI’s)

Climate Bond Standards, only mortgages against properties shown to be in the best 15%

‘carbon intensity’ threshold (in terms of estimated CO2 emissions performance) during the six

years of the bond are allowed to qualify. The properties have to be in the 15% least carbon-

intensive residential buildings in England and Wales, as identified from Energy Performance

Certificate (EPC) data released by the UK government. The properties had to stay in the top

15% during the life of the bond.

As at 31 December 2018 the Barclays allocated EMA (Eligible Mortgage Assets) had an

average emissions of 15.89 kgCO2/m2. This was shown to be 60% lower than the average of

40.4 kgCO2/m2, and 36% lower than the top 15% of lowest carbon intensive properties of 24.8

kgCO2/m2. Barclays calculated that annual CO2 annual avoidance of the portfolio to be 4,691

metric tonnes of CO2. Avoided CO2 per EUR1,000,000 invested came in 9.38 metric tonnes (or

9.38 kgCO2/ per EUR1,000 invested)20.

______________________________________ 18 'Ontario Green Bond Q&A', Province of Ontario. 19 'Toronto goes green, raises CAD300m and saves on interest by doing so', Financial Post, 18 July 2018. 20 'Barclays green bond investor report', Barclays, February 2019.

15

Fixed Income ● Credit October 2019

Figure 7 sets out green, social and sustainability bonds issued by cities and regions in euros.

Figure 8 displays green, social and sustainability bond issued by real estate firms in euros.

Figure 7. EUR GSS bonds issued by sub-sovereigns

Figure 8. EUR GSS bonds issued by real estate firms

Source: Dealogic, Bloomberg, HSBC as of 15 Oct 19 Source: Dealogic, Bloomberg, HSBC as of 15 Oct 19

FLEMSH 33

WALLOO 26

WALLOO 34

IDF 29

IDF 33

VDP 34

RLOIRE 30

RLOIRE 33RLOIRE 40

OCCTNE 33

NRW 27 NRW 28

NRW 34

MADRID 28

MADRID 29

NAVARR 44

BASQUE 28BASQUE 29

BARMUN 27

-0.4

0.0

0.4

0.8

1.2

0 5 10 15 20

Yie

ld (

%)

Duration (years)

SGPAU 21

COFBBB 24

PHLSBG 24

COVFP 31

COVFP 26

INEAFP 25

ICADFP 27

ULFP 24 ULFP 25

FASTIG 26

FASTIG 29

DLR 26 PRIFII 28

PRIFII 30

PRIFII 29

-1

0

1

2

3

4

5

6

0 3 6 9 12

Yie

ld (

%)

Duration (years)

Fixed Income ● Credit October 2019

16

Figure 9 lists green, social and sustainability bond issuance from cities, regions and provinces

(including ABS but excluding US muni green bonds). We include all bonds classified by

Dealogic as ‘government’, but exclude actual sovereign bonds.

Figure 9. City, regional issuers of green, social and sustainability bonds (including ABS but excluding US munis)

Name Ticker Rating Country / region

Date of first green

issuance*

Number of tranches

issued

Amount outstanding

(USDm)

Auckland Council AUCKCN Aa2/AA New Zealand 03/07/2019 2 238 Autonomous Community of Madrid MADRID -/A- Spain 05/02/2019 4 3,457 Autonomous Community of Navarre NAVARR -/- Spain 15/04/2019 1 57 Autonomous Community of the Basque Country BASQUE A3/- Spain 09/04/2019 2 1,260 Ayuntamiento de Barcelona BARMUN Baa1/A Spain 13/12/2017 1 41 Canton of Geneva GENEVA -/AA- Switzerland 09/11/2017 2 620 City of Cape Town CAPTWN -/- South Africa 13/07/2017 1 74 City of Gothenburg GOTA Aaa/AA+ Sweden 25/10/2018 6 699 City of Johannesburg JOBURG Baa3/- South Africa 23/06/2014 1 137 City of Malmo MALMOK -/- Sweden 02/09/2019 5 318 City of Orebro OREBRO -/- Sweden 02/10/2019 7 380 City of Ottawa OTTAWA Aaa/AA Canada 02/11/2017 2 232 City of Toronto TRNT Aa1/AA Canada 09/09/2019 2 380 City of Vancouver VANC Aaa/AAA Canada 11/09/2018 1 65 City of Vasteras VASTER -/- Sweden 24/11/2016 2 81 City of Vellinge VELLIN -/- Sweden 11/06/2018 3 53 Departement de l'Essonne ESSONN -/- France 22/10/2014 1 51 Flemish Community FLEMSH Aa2/- Belgium 12/11/2018 2 1,409 GCDMXCB 16V GDFMX -/- Mexico 07/12/2016 1 49 Ile-de-France IDF Aa2/- France 11/06/2018 5 3,208 Kanton Basel-Stadt KTBS -/AAA Switzerland 24/01/2019 3 439 Municipality of Lund LUNDSK -/- Sweden 17/10/2018 2 152 Municipality of Nacka NACKAN -/- Sweden 07/06/2018 1 57 Municipality of Norrkoeping NORKOM -/- Sweden 10/10/2016 1 70 New South Wales Treasury Corp NSWTC Aaa/AAA Australia 09/11/2018 1 1,310 North Rhine Westphalia NRW Aa1/AA Germany 06/03/2019 5 9,553 Oslo OSLO -/AAA Norway 04/12/2015 1 174 Paris VDP -/- France 09/11/2017 2 693 Province of Jujuy JUJUYA -/CCC+ Argentina 13/09/2017 1 210 Province of La Rioja PRIO -/B- Argentina 16/02/2017 2 300 Province of Ontario ONT Aa3/A+ Canada 25/01/2018 4 2,656 Province of Quebec Q Aa2/AA- Canada 14/02/2019 4 1,756 Queensland Treasury Corp QTC Aa1/AA+ Australia 27/02/2019 2 1,463 Region Limousin LIMOUS -/- France 05/06/2014 2 27 Region Occitanie OCCTNE -/- France 18/09/2018 1 233 Region Wallonne WALLOO A2/- Belgium 25/04/2019 2 1,119 Region des Pays de la Loire RLOIRE -/- France 09/10/2018 3 116 Skane County SKANE -/- Sweden 29/01/2019 4 223 Stockholms Lans Landsting (Stockholm County Council)

STOCKL -/- Sweden 23/05/2019 10 1,324

Tokyo Metropolitan Government TOKYO -/A+ Japan 19/10/2018 4 178 Treasury Corp of Victoria TCV Aaa/AAA Australia 19/07/2016 1 228 Vastra Gotalandsregionen (VGR) VASTRA -/- Sweden 28/05/2018 1 114

Source: Dealogic, HSBC, Bloomberg *Pricing date Defined as Dealogic General Industry Group “Government”, excluding sovereign issuance

Appendices

17

Fixed Income ● Credit October 2019

Figure 10 sets out green bond issuance from private real estate firms and REITs.

Figure 10. Private real estate and REIT green bond issuers (non-Sweden issuers)

Name Ticker Rating Country / region Date of first green

issuance*

Number of tranches

issued

Amount outstanding

(USDm)

Activia Properties Inc ACTPRO -/- Japan 03/07/2019 1 46 Alexandria Real Estate Equities Inc ARE Baa1/BBB+ United States 12/03/2019 4 1,300 Argosy Property Ltd ARGNZ -/- New Zealand 06/03/2019 1 68 Boston Properties LP BXP Baa1/A- United States 12/06/2019 2 1,850 Chongqing Longhu Development Co Ltd

LNGFOR -/- Mainland China 06/03/2017 3 588

Cofinimmo SA/NV COFBBB -/- Belgium 02/12/2016 1 58 Compagnie de Phalsbourg SARL PHLSBG -/- France 08/03/2019 2 201 Covivio COVFP -/BBB+ France 10/09/2019 1 552 Digital Euro Finco LLC DLR Baa2/BBB United States 11/01/2019 2 1,236 Digital Realty Trust LP DLR Baa2/BBB United States 18/06/2015 1 500 ERP Operating LP EQR A3/A- United States 28/11/2018 1 400 Entra ASA ENTRAN -/- Norway 20/05/2019 5 420 Fonciere INEA INEAFP -/- France 21/02/2018 4 124 Fonciere des Regions COVFP -/BBB+ France 09/05/2016 1 570 Franshion Brilliant Ltd CHJMAO -/BBB- Mainland China 14/06/2019 2 250 GLP J-REIT GLPJRE -/- Japan 21/06/2019 2 119 Growthpoint Properties Ltd GRTSJ -/- South Africa 09/03/2018 3 93 Guangzhou Yuexiu Holding Ltd GZYXH Mainland China 23/02/2018 3 559 HAT Holdings I LLC HASI -/BB+ United States 26/06/2019 2 500 Hang Lung Properties Ltd HLPPY Hong Kong 12/07/2018 1 150 Host Hotels & Resorts LP HST Baa2/BBB- United States 12/09/2019 1 650 Housing New Zealand Ltd HOUSNZ -/AA+ New Zealand 11/09/2019 3 726 Hysan (MTN) Ltd HYSAN A3/- Hong Kong 31/05/2019 4 197 ICPF Finance Pty Ltd ICPFAU -/A- Australia 12/04/2017 1 75 Icade SA ICADFP -/BBB+ France 04/09/2017 1 713 Investa Listed Funds Management Ltd

IOFAU -/NR Australia 30/03/2017 1 115

Japan Excellent Inc JPEXCL -/- Japan 03/08/2018 1 36 Japan Real Estate Investment Corp JREIT -/- Japan 26/10/2018 1 89 Kenedix Office Investment Corp KDXRLT -/- Japan 08/02/2019 1 18 Kilroy Realty Corp KRC Baa2/BBB United States 14/11/2018 1 400 Landsea Green Group Co Ltd LSEAGN B3/B- Mainland China 17/06/2019 3 400 Link Finance (Cayman) 2009 Ltd LINREI A2/A Hong Kong 14/07/2016 1 500 Mitsubishi Estate Co Ltd MITEST A2/A+ Japan 20/06/2018 1 182 Mitsui Fudosan Co Ltd MITSRE -/- Japan 06/09/2019 1 468 Modern Land (China) Co Ltd MOLAND B3/- Mainland China 17/04/2019 7 1,500 Nanjing Fullshare Industrial Group Co Ltd

NJFSHO Mainland China 19/07/2017 2 373

New World China Land Ltd NEWWOR -/- Hong Kong 28/11/2018 1 310 Nippon Prologis REIT Inc PROREI -/- Japan 10/08/2018 1 54 Nomura Real Estate Master Fund Inc NOMURF -/- Japan 13/09/2019 1 28 OBOS Forretningsbygg AS OBOS -/- Norway 20/10/2017 1 54 Pingxiang Huifeng Investment Co Ltd PXETMC Mainland China 20/09/2017 1 304 Prologis International Funding II SA PRIFII A3/A- United States 25/06/2019 3 1,220 RE IV Ltd REIVLT -/- Mainland China 05/07/2019 1 64 Regency Centers LP REG Baa1/BBB+ United States 13/05/2014 1 250 Rodamco Sverige AB ULFP -/NR France 23/05/2014 0 0 Shaanxi Xixian New Area Fengxi New City

SXXXFX Mainland China 22/08/2017 1 225

Shanghai Lingang (Group) Co Ltd SHLGED Mainland China 15/03/2018 2 158 Stockland Trust Management Ltd SGPAU -/A- Australia 22/10/2014 1 383 Swire Properties MTN Financing Ltd SWIPRO A2/- Hong Kong 03/01/2018 1 500 Toda Corp TODA -/- Japan 07/12/2018 2 133 Tokyo Tatemono Co Ltd TOKTAT -/- Japan 08/03/2019 1 448 TusPark Co Ltd THSCPA Mainland China 18/08/2017 2 137 Unibail-Rodamco-Westfield ULFP -/A France 08/04/2015 2 1,579 Vornado Realty LP VNO WR/NR United States 09/06/2014 0 0 Yiwu State-owned Capital Op Co Ltd YWSOAO Mainland China 11/07/2017 2 229 Zhenjiang Dantu District Construction Investment Co Ltd

DANTU Mainland China 03/11/2017 1 212

Zhuhai Huafa IDevelopment Co Ltd ZHHFGR Mainland China 29/03/2018 1 159 Zug Estates Holding AG ZUGNSW -/- Switzerland 04/09/2019 1 101

Source: Dealogic, HSBC, Bloomberg *Pricing date

Fixed Income ● Credit October 2019

18

Disclosure appendix

Analyst Certification

The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)

whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering

analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or

issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other

views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect

their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific

recommendation(s) or views contained in this research report: Michael Ridley and Dominic Kini

Important disclosures

Fixed income: Basis for financial analysis

This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision

to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which

depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given

these differences, HSBC has three principal aims in its fixed income research: 1) to identify long-term investment opportunities

based on particular themes or ideas that may affect the future earnings or cash flows of companies in corporate credit and based

on country-specific ideas or themes that may affect the performance of these bonds in the case of covered bonds, in both cases

on a six-month time horizon; 2) to identify trade ideas on a time horizon of up to three months, relating to specific instruments and

segments of the yield curve, which are predominantly derived from relative value considerations or driven by events and which

may differ from our long-term credit opinion on an issuer. Buy or Sell refer to a trade call to buy or sell that given instrument; 3) to

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HSBC has assigned a fundamental recommendation structure, as described below, only for its long-term investment opportunities.

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HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong Securities

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Definitions for fundamental credit and covered bond recommendations from 22 April 2016

Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve over the next six months. For covered

bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.

Neutral: For corporate credit, the issuer’s fundamental credit profile is expected to remain stable over the next six months. For

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Underweight: For corporate credit, the issuer’s fundamental credit profile is expected to deteriorate over the next six months.

For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over

the next six months.

Prior to this date, fundamental recommendations for corporate credit were applied on the following basis:

Overweight: The credits of the issuer were expected to outperform those of other issuers in the sector over the next six months.

Neutral: The credits of the issuer were expected to perform in line with those of other issuers in the sector over the next six months.

Underweight: The credits of the issuer were expected to underperform those of other issuers in the sector over the next six months.

19

Fixed Income ● Credit October 2019

Distribution of fundamental credit and covered bond recommendations

As of 15 October 2019, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:

All Covered issuers Issuers to whom HSBC has provided Investment Banking in the past 12 months

Count Percentage Count Percentage

Overweight 128 23 79 62 Neutral 281 52 146 52 Underweight 134 24 52 39

Source: HSBC

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Fixed Income ● Credit October 2019

20

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Our multi-channel research

Main contributorsMichael RidleyGlobal Head of ESG Fixed Income ResearchHSBC Bank plcmichael.a.ridley@hsbc.com+44 20 7991 5918

Michael is responsible for global Green Bond, Sovereign and Credit ESG research at HSBC. He also covers regulated Utilities Credit research. Michael joined HSBC Global Research in 2015 with almost 20 years of experience, having previously worked in senior credit research positions at major US and Japanese investment banks. Michael is a highly ranked analyst; most recently he was ranked #2 in the 2019 Euromoney Fixed Income survey for Green bonds/ESG. Michael has a PhD in Environmental Economics from University College London and Master’s degrees from Yale and LSE.

Dominic KiniAnalyst, Quantitative Credit StrategyHSBC Bank plcdominic.kini@hsbcib.com+44 20 7991 5599

Dominic works as a European Credit Strategist within HSBC’s Global Fixed Income Research team. He is responsible for top-down macro thematic and quantitative credit strategy. Dominic has worked in finance since 1997, specialising in portfolio strategy and credit strategy. He holds a PhD in Mathematics.

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