Green Bonds - AFOLU Update & prospects

Tanja Havemann, Director – ClarmondialPartner to the Climate Bonds Initiative

London, 10th of June 2015

Bonds 101One potential financing solution of many – suitability depends on the situation!Debt: repay loan + interest (commercial)Usually large, mature assets with low risk, long-term (e.g. refinancing)Issued by companies, governments, etc.Important part of portfolio for investors such as pension funds, insurance companies Government-backed may be paired with investment incentivesUsually rated by independent credit rating organizationsMay be traded, depending on capital market rulesLocal or foreign currency May be secured against an asset Islamic finance = “Sukuk”

Social / impact / development bonds are different!

Emergence of labeled bonds

History

Current

Future?

• Development Finance Institutions (e.g. EIB)• Independent second opinions on environmental and social issues• Green Bond Principles• Climate Bond Initiative & Standard (CBI)

• Over subscriptions, investor diversification & stickiness – signaling • Lack of price differentiation• NGO & investor concerns about quality• Climate Bonds Standard - consistent information collection,

transparency and definitions

• Price differentiation for “credible” bonds (standards, second opinions)

• Standards covering more sectors• More information enabling differentiation (“shades of green”)• Increased government incentives

SRI = $13tn global$88tn institutional

$30tn Insurance$27tn Pension$6tn Sovereign wealth$25tn Fund managers, mutuals, foundations

EMs = $5tn

We have investor demand

90% investment grade

Refinance as well as projects

USD$1.2bn

$11bn

$3.1bn

$36.6bn

2015

: $70

exp

ecte

d

Targ

et $

100b

nGreen bonds have grown up

It’s about Use of Proceeds

Transparency, independent review

Vanilla + comparable pricing

In 2014, 65% had independent reviews

Issuer types 2014

Any issuers can go green

Benefits• Investor

diversification • Stickiness• Longer tenors• Multi-asset for scale

Transparency, use of proceeds, consistent science-based approach to eligibility…

Proceeds goto “green”

Any entity

Issuerbenefits

Buyerbenefits

Ring-fenced, transparent Reporting + independent review Refinancing & projects

Governments, DFIs (45% 2014), Muni’s Companies (35% in 2014) Asset backed, e.g. banks, PPPs

Investor diversification & engagement Longer tenors Multi-asset pools

Transparency Fits “ESG” portfolio allocation portion Potential incentives

2014USD

36.6bn

2015> USD 50bn

Opportunities = scale / liquidityExpert groups = science-based definitions

Renewable energyEnergy storageGeothermal

Green buildingsGreen infra

Industrial efficiencyRE supply chain

Rail, BRTsLow emission vehicles, Electric Vehicles

Clean water Storm adaptation

Waste managementMethane reduction

AgricultureSustainable forestryFood supply chain

Reference: www.ClimateBonds.net/Taxonomy

42%

15.5%

0%

7%

7%

8%

13%

% = share of assets for bonds issued this year

Standard definitions & certification

Climate Science frameworkPotsdam Institute Climate Science+ IIASA, PBL, FEEM

Expert Committees

Green Property, Transport, Agriculture, Water++ 80 organizations + academics

Industry Advisory CommitteesInvestors, investment banks, verifiers

Independent verifiersEY, KPMG, Oekem, Bureau Veritas, TruCostSustainalytics, DNV-GL

$34tn Standards Board AFOLU TWG:USAID LEAF, USDA, ICRAF, WWF, University Wisconsin-Madison, VCS, SCOPE, CCROM-SEAP, CATIE, EIB, etc…

AFOLU IWG:Credit Suisse, Rabobank, Banorte, World Bank, IADB, ADM, Hassad Food, Olam, Hancock, Fibria, TNC, etc..

AFOLU sector specific

Agriculture, Forestry and Other Land Uses: all land-use sectors, including near & on-shore fisheries, limited to natural resource managementMitigation & adaptation included equally: investment in natural resource management directly resulting in reduced GHG emissions and, or, meaning adaptation and resilience with the AFOLU sectorsAt minimum, investment should net positive impact on carbon stocks, positive impact on adaptation in a manner consistent with national and sector priorities and other scientifically robust guidelinesPeriodic & independent assessment of activities and outcomesAt minimum no net harm on local communities or ecosystem servicesTo the extent possible, leverage existing standards, best practice and metricsExpected for public consultation this summerThis is a start: regular review and updating of sector specific guidance

Potential examplesBond type Example

issuerRevenues Purpose Examples

Public sector

Government agency

Government budget, SPV with guarantee

National food security

CSA programs, infrastructure (ABS SPV)

Financial institution

Bank From borrowers, backed by bank

Financing to agri-co’s

Syndicated loans to agri-portfolio

Portfolio Asset manager

Commercial activities

Funding for mix of investments

Mixed ag & forestry portfolio

Project Project owner (asset manager)

Project revenues Funding for specific project

Large project

Corporate Food & beverage company

Company (corporate balance sheet)

Source investment

Range of supply chain activities

www.climatebonds.net