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Sustainable Financing NewsletterEdition 2 – September 2016
2
Introduction & OverviewThe global green bond market has continued to make encouraging
headway in the first half of 2016. According to numbers published by
Bloomberg1, by early June, issuance was up 80% year-on-year. At
this rate of growth, Bloomberg calculates that issuance for the year
will reach close to $56 billion, compared with $46 billion in 2015.
Moody’s, meanwhile, has revised its February forecast upwards, and
now believe that issuance in 2016 could amount to $75 billion2, while
HSBC Research believes the figure will be between USD55 - 80bn.
In line with the forecasts made by many analysts at the start of 2016, China
has led the way, accounting for about a third of global issuance in the first
five months of this year and approving issuance of USD8.5bn in H1 20163.
Other leading emerging economies, however, have also re-emphasised
their commitment to building broader and more liquid markets for
sustainable financing. R Gandhi, Deputy Governor of the Reserve
Bank of India (RBI) has openly called for more green-based lending,
while the Securities and Exchange Board of India (SEBI) has developed
guidelines for green bond issuance back in January 20164. Among
issuers, Axis Bank launched India’s first internationally-certified green
bond in June, a $500m five year transaction listed on the London Stock
Exchange which was oversubscribed by 2.2 times. Many others are
likely to follow in Axis Bank’s footsteps. As the Climate Bond Initiative
(CBI) commented in a blog published in early May following a visit
to India, “it’s clear that momentum behind green finance in India is
rapidly growing and the size of the potential deal-flow is staggering.”
Turkey, meanwhile, celebrated its first green issue in May with a $300
million five year deal from the investment and development bank, Turkiye
Sinai Kalkinma (TSKB). HSBC was one of the lead managers of the TSKB
bond, which generated demand of $3.9 billion, making it the largest
book for a Turkish FIG issuer since 20145. It also signified the first ever
Green/Sustainable Bond out of both Turkey and CEEMEA region and
the biggest ever orderbook for a RegS Only transaction out of Turkey.
Elsewhere in the emerging market universe, Banco Nacional de Costa
Rica launched Latin America’s fourth green bond in April, while Mexico
has recently set up a Green Bonds Working Group, which could
pave the way for more than $2 billion of issuance over the next three
years, according to estimates from the Climate Bonds Initiative6.
CONTENTSINTRODUCTION & OVERVIEW 2
EDITORIAL 4
CHINA – RAISING THE BAR IN THE GREEN BOND MARKET 5
UK EMISSIONS TARGETS SET TO 2032 8
DOES BREXIT AFFECT CLIMATE CHANGE GOALS? 9
THE QUARTER IN REVIEW 10
HSBC’S SUSTAINABILITY LEADERSHIP PROGRAMME 14
3
In Europe and the US, there were a number of indications in
the first half of 2016 that the green bond market is maturing.
In May, for example, KfW extended its curve in green bonds to
eight years, with a very well-received 2024 transaction attesting
to the growing maturity of the market, while EIB also tested
demand at the longer end of the market with a $1.5 billion 10
year climate awareness bond (CAB) in April. With multinational
development banks such as the Asian Infrastructure Bank
(AIIB) also expected to issue in green format, an increasingly
diversified market for supranational green bonds is clearly
taking shape across the world. Sovereigns may also be
adding to liquidity at the highly-rated end of the market; a
notable recent milestone for sustainable finance has been
the indication from France that it could become the first
government in the Eurozone to issue a green bond.
In the credit space, one of the most striking indications of the
increasingly diverse range of issuance in the green market in
the second quarter of 2016 was the launch by Obvion of the
Netherlands of the first 100% green residential mortgage
backed security (RMBS). The $500 million Green Storm
structure, issued to refinance energy-efficient housing in the
Netherlands, generated demand of more than X1.2 billion.
Q2 also saw the BRICS New Development Bank come
to market. Not only was this the first green bond from
the newly formed development bank, but also its maiden
foray into the Debt Capital Markets. HSBC provided a
green structuring review and acted as Joint Lead Manager
on the trade. Other notable firsts from this transaction
were that it signifies the first onshore RMB bond issued
by a Supranational issuer since 2009, the first RMB
Green bond to be priced by a SSA in mainland China and
the largest onshore RMB bond printed by a MDB.
Issuance has also continued to gather momentum from
companies raising funding for key renewable projects.
Recent months have seen well-received green bonds
from borrowers such as Spain’s Iberdrola, Sweden’s
Wallenstam, and Netherland’s TenneT, all of which are
using the proceeds of their green issuance to support
investment in onshore or offshore wind energy projects.
In the US, San Francisco Public Utilities Commission (SPUC)
recently became the first entity to issue a bond certified
under the new Climate Bonds Water Criteria. This $240
million Wastewater Revenue bond is likely to be the first of
many, given that California alone has a funding gap in the
water sector of about $24 billion, according to Ceres7.
Encouraging Signals from the Buy-Side
On the demand side, there have also been a number of
encouraging indications recently pointing to increased
support for green issuance. For example, an inaugural
survey of 150 CIOs and heads of fixed income published
in June by FinanceAsia in association with HSBC and
S&P Global Ratings found that 55% of investors are
likely to invest in green bonds over the next year. Only
20% said they were unfamiliar with green bonds.
The consensus among market participants, however,
appears to be that more still needs to be done to encourage
a broader community of investors to support the growth
of the green bond market. As Jean-Marc Mercier, co-
head of debt capital markets at HSBC, told the Financial
Times in June8, depth and scale would be added to
the green bond universe if investors were offered tax
benefits as they are in the US municipal market.
1 www.bloomberg.com June 8 20162 https://www.moodys.com/research/Moodys-Q2-green-bond-issuance-shows-quarterly-high-market-to--PR_3527043 HSBC Research, ‘The Big Long’ report4 http://cleantechnica.com/2016/01/15/indian-regulator-approves-rules-issue-list-green-bonds/5 Reuters, May 13 20166 Climate Bonds Initiative blog, June 9 20167 http://www.ceres.org/press/press-releases/san-francisco-public-utilities-commission-issues-world2019s-first-certified-green-bond-for-water-infrastructure
8 FT, June 8 2016
4
Editorial CommentUlrik Ross, Global Head of Public Sector and Sustainable Financing, Capital Financing, HSBC
We are operating in uncertain and unprecedented times across
Europe driven by the UK’s decision to exit the European Union
(“EU”) on 23rd June. Uncertainty is no-ones friend, least of all
investors.
Despite the challenging macro environment, Governments in
Europe and across the globe still need to come together and
step up implementation of solutions that will deliver on the
targets agreed at COP21. Two key points we must not forget:
that Greenhouse Gas (“GHG”) emissions need to peak in 2020
in order to deliver a 2 degree world; and $90 trillion needs
to be invested globally in infrastructure in the next 15 years.
These are not small asks.
Delivering the transition to a low carbon economy will require
transparent national planning. So far there have only been a
smaller number of sovereign commitments to green financing
solutions. As an example, China of course has been at the
forefront, but France has similarly shown strong commitment
with actions covering regulations, investor labels and the
expected Eur 9.2bn Ircantec green bond fund to be established
by the end of the year. The Hong Kong Financial Services
Development Council (“FSDC”) published a report in May
which includes recommendations for green bond issuance
by the Hong Kong governments and other public entities, the
establishment of a Green Finance and Advisory Council and
the foundation of a green labelling scheme covering projects
and securities to attract new issuers and investors. It is an
example many others could and perhaps should follow.
We expect to see increased communication and commitments
to green financing by sovereigns leading up to the G20 Summit
chaired by China in September in Hangzhou. The July G20
Finance Ministers Communiqué showed us how the issue is
growing in prominence with the text recognising the need to
scale up green finance.
On the investor side we are seeing a major uplift in
commitments to the green agenda from divestment in the
fossil fuel sector, launch of additional ETF funds by Blackrock
(now representing USD 1.2bn in assets), the announced plan
by IFC to establish a USD 1-2bn emerging market green bond
fund, and additional new green bond investment commitment
like the one recently launched by NIB. In our view one of the
key trends that will shape the future investment landscape is
the implementation of both positive and negative screening
of companies on environmental, social and governance (ESG)
criteria. This will set the stage for more Smart Beta funds,
such as the recently launched fund from AXA Investment
Managers. Most investors are now up to speed on negative
screening and green bonds, but the positive screening opens
up for more investment into climate aligned bonds, Moody’s
rated GB3-5 Green Bonds, “pure play” green bonds as
well as social bonds. At HSBC we believe it is increasingly
important, with more diversified products on offer, to continue
to distinguish between the different “shades of ESG” to best
align product offerings with investor demand.
On the product side we have seen new indices, new listing
opportunities by stock exchanges, new ETF investments
and Green Equity Index linked and other structured products.
These have been offered alongside the recently updated
Green Bond Principles (GBP) and the launch of the Social Bond
Guidance at the June ICMA GBP Annual General Meeting
hosted by the EBRD in London.
In addition according to Dealogic there has been an increase
in green bond issuance H1 2016 vs H1 2015 of around 50%
with around USD 40bn in volume. China has played a very
important role in the most recent evolution of the green bond
market including the largest ever issued green bond from
Bank of China (USD 3.03bn equivalent over 4 tranches lead
managed by HSBC). In India we saw the issuance of USD
500m from Axis Bank, as well an inaugural green bond from
TSKB in Turkey - all lead managed with structuring support
from HSBC. In H2 we expect to see the trend continuing.
Lastly, we hope to see Governments take bold and decisive
steps to deliver on their Nationally Determined Contributions
commitments at COP21. These will act as a catalyst for the
private sector - Brexit or not!
5
China – Raising the Bar in the Green Bond MarketThe speed with which the primary
market for green bonds is expanding
is graphically illustrated in the recent
revision by Moody’s of its forecast
for issuance in 2016. At the start of
this year, it projected forecast that
global issuance of would reach $50
billion in 2016, up from $42.4 billion
in 2015. The agency has recently
revised this number to $75 billion.
What has remained constant, however,
is the widely-shared conviction that
rising volumes from China and India
are underpinning much of the increase.
The view that China would a leading
source of new issuance this year was
widely echoed. As one commentator
confidently predicted in January, “there
is no doubt that 2016 will not only be
the Year of the Monkey—it will be the
year of the green bond market as well1.”
If activity in the first half of 2016
- especially in Q1 - is any guide,
China’s domestic and international
markets are already delivering on this
promise, contributing to much of the
rise in global supply of green bonds.
International issuance by Chinese
borrowers has continued to gather
notable momentum in recent months,
with a diverse range of borrowers
coming to the market. Most recently,
the Bank of China raised around
$3.03 billion by issuing multi-currency
green bonds, in US dollars, Euros, and
Chinese Yuan, and reportedly received
a spectacular response. Among other
leading Chinese banks, Industrial Bank
of China has also issued its inaugural
RMB10bn ($1.5 billion) green bond.
In the corporate sector, meanwhile, in
May, Zhejiang Geely Holdings Group
(ZGH) priced the first ever green bond
by a Chinese automobile company
in the offshore market. This was a
$400 million five year transaction,
the proceeds of which will support
the roll-out of zero-emission black
cabs by ZGH’s UK-based subsidiary,
the London Taxi Company. Demand
for this landmark issue was such
that it was oversubscribed by close
to six times, with pricing of 2.75%
representing the tightest ever in
the dollar market for an automobile
company from Greater China.
The expansion of China’s market for
sustainable finance is a by-product
of the government’s increasingly
strong commitment to addressing
the environmental damage caused
by the breathless expansion of the
country’s energy-intensive economic
boom of the last 10 years. Already,
much has been done to arrest and
even reverse some of this damage.
Perhaps surprisingly, given international
press coverage about China’s pollution
problem, concentrations of sulphur
dioxide, nitrogen dioxide and inhalable
particulate matter in Beijing all declined
between 1998 and 2013, according
to a recent UNEP report. This advises
that the trend has been driven by a
decrease in coal consumption in the
power sector and a drop in vehicle
emissions resulting from stricter
pollution control measures. According
to the same report, coal use in China fell
from a peak of 9 million tonnes in 2005
to 6.44 million tonnes in 2013, while
the 2013 levels of carbon monoxide
dropped by 76% compared to 19982.
Nevertheless, it is estimated that China
needs an annual investment of at least
RMB2-4 trillion ($320-640 billion) to
address environmental degradation
and climate change3. According to
the People’s Bank of China (PBoC),
public investment will only be able to
meet 10% to 15% of this total. The
shortfall, which could be as much
as $576 billion, will need to come
from private sector investment.
Small wonder, against this backdrop,
that the development of China’s
green capital market has enjoyed
the full and co-ordinated support
of the government, in the form of
green bond guidelines issued by
the PBoC and the Green Finance
Committee (GFC) in December 2015.
6
The first issuers to respond to these
guidelines were Shanghai Pudong
Development Bank and Industrial Bank
Co, which printed green bonds raising
20 and 10 billion yuan respectively in
early 2016. The success of these deals
twinned with the clear push by the
government to support the development
of the market has prompted some analysts
to predict that issuance of green bonds
in China could reach 300 billion yuan
per year between now and 20204. It
has also encouraged other jurisdictions
to strengthen their efforts to build their
credentials in green finance, with Hong
Kong a notable example (see below).
Initiatives to support Growth of the
Green Bond Market
A number of other important measures
have been implemented in the first half
of 2016 to support the growth of China’s
green capital market. These include the
Shanghai Stock Exchange’s Green Bond
Pilot Initiative, launched in March, which
was a key step towards promoting trading
of green bonds on the Exchange. As part
of this programme, the Shanghai Exchange
will encourage firms to secure independent
professional assessments on whether
their projects qualify as green. It will also
encourage financial institutions, brokerages,
pension funds and other institutional
investors to invest in the securities5.
Another important landmark in the evolution
of the Chinese green bond market was
the announcement that Zhongcai Green
Financing had won approval to certify
bonds against the climate bond standard.
Zhongcai is the commercial arm of the
Research Centre for Climate and Energy
Finance based at the Central University
of Finance and Economics in Beijing.
Wai Shin Chai, Climate Change Strategist
at HSBC in Hong Kong, says that the
series of initiatives designed to strengthen
China’s green financial market dovetails
neatly with the government’s broader
strategy of instilling some much-needed
discipline into the country’s rapidly evolving
domestic capital market. “By ensuring
that the appropriate infrastructure is
in place to support a market based on
legitimate investment principles, the
government is successfully addressing a
number of challenges at the same time,”
he says. “As well as helping to tackle
environmental problems and enhancing
the country’s international profile, it is
supporting the growth of China’s bond
market and promoting a move away
from speculative investment in the local
stock market. By emphasising to local
investors that they are contributing to
the public good by supporting the green
bond market, they are encouraging what
may be described as duty investing.”
In April, the Hong Kong-listed wind and
solar power company, Concord New
Energy Group, created a notable landmark
when it became the first non-financial
entity to issue a green bond in the domestic
debt market. This privately-placed RMB200
million ($30 million) three year transaction
was priced at 6.2%, and came soon after
Concord New Energy’s announcement
that it had registered an RMB500 million
green bond Programme with NAFMII6.
Another important first was registered the
following month, when Beijing Motors
Corporation (BAIC) became the inaugural
state-owned enterprise (SOE) in China
to issue a green bond. Like the Concord
transaction, the RMB2.5 billion ($387.5
million) transaction is part of a broader
green issuance programme of RMB4.8
billion7. 60% of the proceeds of the BAIC
issue will fund the construction of facilities
for upgrading and manufacturing energy
efficient cars and electric vehicles, with
the remaining 40% set aside for working
capital supporting R&D. As the Climate
Bonds Initiative (CBI) noted following the
announcement of the BAIC transaction,
“in a large country like China, where over
20 million vehicles are produced each
year, low emission cars will be crucial
to achieving climate mitigation goals.”
Analysts believe that an increasingly
broad range of borrowers will continue
to add liquidity as well as diversity to
China’s green bond market. Following
the release of the corporate guidelines by
NAFMII, it is expected that the next step
will be the release of local government
or “municipal” green bond guidance.
ANALYSTS HAVE PREDICTED THAT ISSUANCE OF
GREEN BONDS IN CHINA COULD REACH
300 BILLION YUAN PER YEAR BETWEEN NOW
AND 2020
7
Opportunities in Hong Kong
China’s commitment to the development and expansion of its green capital market – encompassing green IPOs
and more sustainable bank lending practices as well as green bonds – is likely to have a conspicuous ripple
effect in North Asia as other regions recognise the importance of championing green finance. Hong Kong is
perhaps the most notable example. A report published in May8 by the HK Financial Services Development
Council (FSDC) cautions that Hong Kong may be in danger of missing a critical opportunity if it does not act now
to maximise its potential as a regional leader in green finance. “The green bond market will receive enormous
impetus from China’s green finance requirements, much of which will need to be raised in international
markets,” notes the FSDC. “Because of Hong Kong’s special relationship with China and its role as the
principal market for offshore RMB, Hong Kong is in a unique position to capture related opportunities.”
The FSDC’s recommendations include the issuance of green bonds by the government and other public
sector entities, the establishment of a Green Finance and Advisory Council, and the foundation of a
Green Labelling Scheme covering projects and securities to attract new issuers and investors.
In the meantime, China will continue to provide an important blueprint for green capital markets across the world,
using its role as chair of the forthcoming G20 summit to promote sustainable financing in Asia and beyond.
Green finance is already on the agenda for September’s meeting in Hangzhou, which some commentators
have said may be as significant to green economic growth as December’s COP21 Paris Summit was to climate
change9. “The G20 meeting will be an ideal platform for China to showcase to the world what it is doing to
promote sustainable finance internally and to lead the way on climate change at a global level,” says Chan.
1http://www.wri.org/blog/2016/01/new-guidelines-china’s-green-bond-market-poised-take-year-monkey2http://www.unep.org/newscentre/default.aspx?DocumentID=27074&ArticleID=361883Roadmap for China: Scaling up Green Bond Market Issuance – Climate Bonds Initiative, International Institute for Sustainable Development (IISD) & Foreign & Commonwealth Office, April 20164Bloomberg, February 4 20165Bloomberg, March 17 20166Global Capital, April 12 20167For more details, see Climate Bond Initiative, May 6 20168Hong Kong as a Regional Green Finance Hub – HK Financial Services Development Council (FSDC) Paper No 239Huffington Post, June 6 2016
8
UK emissions targets set to 2032Ashim Paun, Director at Climate Change Centre of Excellence, HSBC Research
The UK legislated the 5th carbon
budget on 30 June 2016, requiring a
greenhouse gas emissions reduction of
57%, compared with 1990 levels. This
locks in the lowest cost pathway for
emissions cuts to 2032, covering the
period of the Paris Agreement (2020-
30). Under the 2008 Climate Change
Act, the UK sets carbon budgets over
five-year periods to reach its long-term
target of an 80% emissions reduction in
2050. We are currently in the 2nd budget
period (2013-17), when emissions
must be 27% lower than 1990.
The UK has already made good progress.
It has achieved a 38.8% reduction
in its emissions since 1990, which
is ahead even of the 3rd budget and
also substantial when compared with
cuts achieved by global peers. Over
half of this cut was achieved over the
first eight years of carbon budgeting
(2008-15), pointing to the success
of the UK’s legislative approach.
Other factors, however, have also
helped bring emissions down. First,
GDP underperformance since the UK
Treasury’s 2008 Budget, driven by the
financial crisis, has led to less emissions
than expected, meaning targets were
easier to achieve from the point of view
of decarbonising the energy system –
our calculations suggest that almost half
the cut over this period is attributable
to lower GDP, (accounting for the 31%
reduction in the carbon intensity of
GDP since 2008). Second, European
legislation has driven emissions down
in the UK power sector – the Large
Combustion Plant Directive 2001 (LCPD)
led to the retirement of nine UK coal and
oil fired power generation facilities and
emissions reductions from others. By our
calculations, 49% of emissions removed
from power generation were attributable
to the LCPD over 2008-2014. Third,
carbon pricing legislation has given an
economic incentive to reduce emissions
(and thus cut costs) – the European
Emissions Trading System covers
emissions from power and a number of
industrial activities (currently EUR 4.55,
c.GBP 3.75), while the UK’s Carbon Price
Support adds an additional GBP 18 to the
price of each tonne of carbon emitted
from power generation. Fourth, the UK
has also driven emissions down through
greater energy efficiency, supported by
the Climate Change Levy since 2001, a
tax on primary energy use and power.
Do targets translate directly to
performance? The Committee on
Climate Change, which recommends the
carbon budgets, has stated concerns that
the 4th and 5th budget targets (52% and
57% cuts) may be missed. To mitigate
this risk, the Committee has set out the
contribution required from sectors across
the economy. In the power sector,
emissions are expected to come down
as coal is phased out by 2025. However,
with construction of new nuclear
capacity yet to start, it seems likely that
gas rather than renewables will take
more share, supported by government
backing for gas and structural limitations
to renewables penetration, given their
intermittency. The transport sector is
also expected to decarbonise – 19%
of UK emissions come from road
vehicles - with more electric vehicles
and hybrids, plus shipping covered for
the first time in the 5th budget. Greater
efficiency in buildings is expected to
bring overall emissions down by a further
3% over 2020-2030, notwithstanding
a projected 15% growth in the number
of households, while efficiency
improvements and fuel switching are
also needed in manufacturing industry1.
With a new Prime Minister in place, there
is uncertainty over priorities in energy
and climate policy2. However, investor
confidence is buffeted by the mandatory
12-year lead time for legislating carbon
budgets, a key advantage of the
Climate Change Act. Although there is
a chance that a new administration can
challenge the UK Climate Change Act,
we do not think this will be a priority in
the near term and expect sector level
policies to emerge to support longer
term carbon budgeting targets.
1UK : DECC Disbanded https://www.research.hsbc.com/R/29/DfnlfRwKI8wg2UK adopts carbon budget https://www.research.hsbc.com/R/29/fSDpdLkKI8wg g
9
Does Brexit affect climate change goals?Zoe Knight, Managing Director, Head of the Climate Change Centre of Excellence
When the UK voted to leave the EU on 23rd June 2016 it
threw out uncertainty on a number of key climate and energy
policies on both sides of the Channel. What happens to the
UK climate change Act? Will the UK stay part of the European
trading scheme? What will the UK do to renewable energy
goals that were part of the European framework? These
are just some of the questions that investors are asking.
The UK adopted a climate change act in 2008. It is unlikely
that this will be repealed, because the emission reduction
2017 targets are already achieved and the UK is on track
to beat the 2022 goal. New ministers are going to want
to bed down in new roles. Energy is now part of the new
‘Business, Energy and Industrial Strategy’ Department and
climate adaptation issues are likely to be taken up by the
Department for environment, farming and rural affairs.
Mitigating climate change is ultimately about reducing
emissions. Once the UK leaves the EU it will be free
from obligations under the EU’s 2030 Energy and Climate
framework, including a contribution towards the EU-wide
renewables target of a 27% share of energy consumption.
This brings uncertainty on how emission reductions
will be achieved over the medium to long term.
From the perspective of the EU, Brexit would make its
2030 emissions reduction target of a 40% cut vs 1990
levels harder to achieve. The UK has made a greater
contribution than some member states to overall targets
and has legislated for a 57% emissions reduction over 2028-
2032. We calculate that the emissions reductions of the
remaining EU-27 states will have to be 7.6% deeper if the
40% target is maintained than otherwise, in aggregate.
Using less energy is also an effective way of reducing
emissions. The EU’s headline energy efficiency
target, a 27% improvement in 2030 vs 1990, will also
become more challenging. The UK increased its GDP
per unit of energy consumed by 46% over 1990-2014,
whereas the EU-27 only achieved a 33% improvement.
Removing the UK contribution again makes overall
targets more challenging for remaining states.
Another means of driving emissions down is to implement
a carbon price. One way to do this is via cap-and-trade
schemes, which drive sectors to achieve cuts where it is
cheapest to do so. The EU-Emissions Trading Scheme (ETS),
the largest carbon pricing scheme in the world, has already
faced problems in supporting a price as high as it needs to
change industrial practices. We expect the UK’s regulatory
trading status to determine its participation status in the ETS.
If the UK remains inside the European Economic Area, it is
likely to remain in the scheme, since Norway, Iceland and
Liechtenstein operate on this basis and are required to join EU
member states as ETS members. However, if the UK left the
EU but was in the European Free Trade Association (as per
Switzerland), we think the picture is less clear, as the Swiss
operate their own carbon cap-and-trade scheme. A UK exit
from the ETS could be negative for its efficacy - without the
allowances given to UK firms (11% of the total), there would
be less liquidity in the ETS, which could further affect pricing.
No-one likes uncertainty, least of all investors, but bringing
emissions down requires investment. Put broadly, economic
and policy uncertainty from Brexit is likely to sap investor
confidence, while lower-than-expected GDP will in turn impact
energy demand, meaning total capital allocation to low-
carbon transition of the energy system faces new headwinds.
Nevertheless, we believe commitment to addressing climate
change has been developed in many areas of EU-wide and UK
policy frameworks and so expect it to remain strong at both
levels, regardless of the final degree of political integration.
10
The Quarter in ReviewReview of the quarter/ Preview next quarter
Investment disclosure developments were further bolstered in Q2 2016, and continue to look like a key second half of the year focus.
At the ICMA Annual General Meeting in June, the Green Bond Principles (GBP) Executive Committee released the
updated version of the GBP. These focused on enhancing disclosure transparency with the biggest updates made to the
eligible green sector example list and ongoing reporting requirements. See below for a summary of the update:
1. Use of Proceeds categories updated
– Renewable energy – Energy efficiency – Pollution prevention and control Sustainable management of living natural resources
– Terrestrial and aquatic biodiversity conservation – Clean transportation – Sustainable water management – Climate change – Eco-efficient products, production technologies and processes
2. Project evaluation and selection
– The GBP …recommend that an issuer’s process for project evaluation and selection be supplemented by an external review
– Green Bond investors ‘may also take into consideration the quality of the issuer’s overall profile and performance regarding environmental sustainability’
3. Strategy for management of proceeds
– Largely remain unchanged – Focus on Temporary investment structures and the ‘adjusted’ balance, rather than the ‘unallocated’ balance as it is understood that some projects repay early, or get sold and so unallocated balances can go up as well as down
4. Develop reporting strategy and commitments
– Issuers should make, and keep, readily available up to date information on the use of proceeds to be renewed annually until full allocation, and as necessary thereafter in the event of new developments
– Include a list of the projects to which proceeds have been allocated, as well as a brief description of the projects and the amounts allocated, and their expected impact
– The Social Bond Guidance was also released at the GBP AGM. The guidance has been developed to confirm the relevance of the GBP in the Social and Sustainability bond market, and also to add clarification around the type of eligible projects.
– It states: ‘In line with the GBP, the approval of Social Projects should be subject to transparent, issuer-defined eligibility criteria and an associated process for project evaluation. Social Projects should provide clear benefits that can be described and, where feasible, quantified and/or assessed.’
Social Project categories include, but are not
limited to, providing and/or promoting:
• Affordable basic infrastructure (e.g. clean drinking water,
sewers, sanitation, transport)
• Access to essential services (e.g. health, education and
vocational training, healthcare, financing and financial services)
• Affordable housing
• Employment generation including through the potential effect
of SME financing and microfinance
• Food security
• Socioeconomic advancement and empowerment
Examples of target populations include, but are not
limited to, those that are:
• Living below the poverty line
• Excluded and/or marginalised populations and /or communities
• Vulnerable groups including as a result of natural disasters
• People with disabilities
• Migrants and /or displaced persons
• Undereducated
• Underserved
• Unemployed
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For more information see the ICMA webpages
at www.icmagroup.org/socialbonds.
• Q2 also saw the release of the CBI / HSBC State of the
Market report. (Source - http://www.climatebonds.net/
resources/publications/bonds-climate-change-2016)
This is the fifth edition of the report which focuses on sizing the
climate investment opportunity, distinguishing between labelled
Green Bonds and the Climate Aligned Bond universe.
• Current issuance: Total labelled green bonds outstanding
were USD118bn at June 2016 (vs. USD65.9bn at June 2015
and USD36.6bn by end of 2014)
• Future issuance: Issuance is expected to ramp up in the
second half of 2016. The Climate Bonds Initiative estimates
total 2016 issuance could reach $100bn
• Issuers: 43% of the bonds outstanding fall into the AAA
credit ratings band, although Corporate bond and commercial
bank bond issuance continues to grow
• Maturity focus: The average tenor of labelled green bonds
is between 5-10 years
• A broad range of use of proceeds: Energy (29%) and
Buildings & Industry (15%) are the largest themes with many
issuers opting for multi-sector, which makes up 49% of the
market and comprises bonds with a mixed use of proceeds
for a variety of projects
• Many currencies but volume remains in USD and EUR:
25 different currencies represented, with the bulk remaining
in US dollars and Euros (80%)
• Pricing: View is that pricing will (and should) remain tight,
but within limits acceptable to the majority of investors.
Beyond this, green investments should and will be
preference using government policy tools.
• Standards can help to boost the market: Bonds that have
received an external review make up approximately 60% of
the labelled green bond market - this has remained relatively
constant year on year
• Key takeaways: – COP21 commitments mean that vast green infrastructure investments are needed.
– The capital needed is available and it needs infrastructure style yield.
– Institutional investors say they want green; the green bond market is evidence of that demand.
– Governments now need to act to bring green infrastructure projects to market.
• Potential future developments: – Develop local green bond markets – Ambition adequate to the challenge ... Governments at national and sub-national levels need to turn their now ubiquitous climate change plans into green investment plans that can be used to drive financing strategies.
– An opportunity for governments to act ... Action to bring green infrastructure projects to market will deliver deal flow for pension and insurance funds, and deliver it with
the risk/yield profiles investors need.
Also this quarter we have seen plenty of action on the
investor side, a few examples are shown below:
AXA Investment Managers (AXA IM) has launched a
‘smart beta’ fund that incorporates both positive and
negative screening of companies on environmental,
social and governance (ESG) criteria.
The AXA World Funds Global SmartBeta Equity ESG fund
aims to outperform the MSCI World Index by between
1% and 2% annually, with 80% of the volatility, and better
ESG performance, including a lower carbon footprint.
The screening process removes companies with low
ESG scores and increases exposure to firms with high
ESG scores, using a ‘best-in-class’ approach.
It is currently being offered to institutional investors
in Europe, with a retail share class being planned
for later this year. AXA has offered a similar ‘smart
beta’ equity fund in Australia since August 2014.
Source: https://www.environmental-finance.com/
content/news/axa-im-launches-smart-beta-esg-fund-
for-european-investors.html?utm_source=713na&utm_
medium=email&utm_campaign=alert
• IFC plans $2bn emerging market green bond fund
The $2bn Green Bond Cornerstone Fund will provide anchor
investments for green bonds issued by financial institutions
in emerging markets.
IFC will also offer issuers advice on how to structure the
bonds in line with the Green Bond Principles
Source: https://www.environmental-finance.com/content/
news/ifc-plans-2bn-emerging-market-green-bond-fund.html
• Blackrock launches two new ESG ETFs for retail investors,
now offers seven ESG ETFs representing $1.2bn in assets – The new ETFs will optimize traditional indices to overweight companies with strong ESG ratings (based on MSCI ratings):
– I. iShares MSCI EAFE ESG Select ETF (ESGD): companies in Europe, Asia and Australia
– II iShares MSCI EM ESG Select ETF (ESGE): emerging markets companies Source: Bloomberg
12
• Ircantec, the €9.2bn French public sector, are reported
to be setting up a dedicated green bond fund at the
end of this year. The pay-as-you-go pension fund has
already invested over €300m in green bonds since 2013,
representing 7% of its overall bond holdings held previously
within its general bond fund. The new dedicated green bond
fund will be mandated to invest in green bonds from issuers
in OECD countries and structured as a fonds commun de
placement (FCP) open-ended fund. A tender for the manager
to run the fund will be put into the market shortly.
Source: https://www.responsible-investor.com/home/
article/responsible_funds_july_8/
• Analysis: Australia’s asset managers double ESG uptake
in two years as Nordics continue to lead. Another new
study – the annual benchmark report by the Responsible
Investment Association Australasia (RIAA) – suggests that
SRI uptake may be faster and keener in the antipodes.
It reports that just shy of half (47%) of all professionally
managed assets in Australia were invested responsibly
in 2015, accounting for around A$633bn (€435bn) of
investments. Money held in “core responsible investments”,
which RIAA defines as sustainability-themed investments,
ESG screened products and impact or community finance
vehicles, contributes $51.5bn to this figure, double the
figure two years ago and representing a significant rise as a
proportion of Australia’s total assets under management: up
to 3.8% in 2015 from 2.5% in 2014.
Source: https://www.responsible-investor.com/home/
article/analysis_australias_asset_managers_double_esg/
Key facts & figures – including deals and state of
the market
USD40.5bn equivalent over 44 green bond transactions has
been issued 2016 YTD, (as at July 26th July, per Dealogic
database), up 50% in value terms from 1H 2015.
HSBC DCM database records USD40.373bn equivalent
over 44 green bond transactions including those of above
USD300m size, or USD44.872bn equivalent over 111
green bonds, with no filter (as at July 28th July).
The notable Chinese transactions of Q1 are followed
up with a new issue from Bank of China, (executed 5th
July), USD3.03bn equivalent over 4 tranches (USD,
USD, EUR, CNY), bringing to market the largest green
bond ever issued (more details below). Also late July,
we saw Industrial Bank return to the Green Bond market
with its second transaction USD 3bn equivalent.
Q2 alone saw approximately USD14.2bn equivalent over
22 transactions, vs approximately USD10.6bn equivalent
over 21 transactions Q2 2015. Average deal size 2016
Q2 was USD646m equivalent, compared to USD508m
comparable PY quarter. The Q2 2016 size increase can
to some extent be explained by large deals from EIB
(EUR1.5bn 10yr), Iberdrola (EUR 1bn, 1.13%, 10yr) Toyota
(USD1.6bn 0.5% split tranche maturities 1yr-6yr).
Corporate issuance has dominated the quarter with
USD7.3bn over 12 transactions (over 11 issuers) due in part
to big deals from Iberdrola (EUR1bn, 10y, XS1398476793)
and TenneT (EUR1bn 10y and 20y, XS1432384409 &
XS1432384664) and Starbucks (US855244AK58 )and
Fonciere Des Regions (FR0013170834) mentioned below.
SSA follows with USD4.5bn over 5 transactions from 5
issuers, as we see the second ICO Social Bond (timed
very nicely for the release of the Social Bond Guidance,
mentioned above) and their second Annual Sustainable Bond
Forum (held in Madrid 29th June). EIB broke the USD1bn
equivalents, issuing USD1.5bn 10yr (US298785HD17)
as did KfW issuing EUR1bn 8yr (XS1414146669).
FIG lagged behind in Q2 bringing to market only 2.5bn
over 5 transactions that all hovered around the USD 500m
mark. ABN Amro and DKB issuing EUR500m (USD559m
equivalent XS1422841202 & DE000GRN0008 respectively)
being the largest (we have excluded the Bank of China
Green Bond here, noting that it was early July trade).
Notable firsts include:
• Bank of China (Green Bond) EY assurance: 4 tranches
(USD750m 1.67% Dec2019, USD1bn 2.25% Dec2021,
EUR500m 0.75% Dec2021, CNY1.5bn 3.40% Dec2018
(USD3.03bn equ.) (issued 05/07/16)
• Axis Bank (Green Bond) CBI certification: USD500m 2.88%
Jun2021 bond (issued 23/05/16) - the first G3 Green bond from
India to be independently certified by a second party reviewer
• Fonciere Des Regions (Green Bond) Vigeo Second Opinion:
EUR500m 1.88% Jun2026 bond (issued 20/05/16)
• Turkiye Sinai Kalkinma Bankasi -TSKB Bank (Sustainability
Bond) Sustainalytics Second Opinion: USD300m 4.88%
May2021 bond (issued 18/05/16)
• Starbucks (Sustainability Bond) Sustainalytics Second
Opinion: USD500m 2.45% Jun2026 bond (issued 16/05/16)
*Source: HSBC DCM database. Filtered for deals over
USD300m equivalent. Please note: Adjustments on last
quarter figures have been made following a review of the
database which has refined those deals classified as eligible
13
Looking through to the second half of 2016 we believe that the FIG Green Bond volume will continue to be bolstered by the
Chinese banks, but we also encourage the European and American institutions to embrace new and follow up transactions. We see
more pressure on banks to increase Green Bond issuance as the COP21 Nationally Determined Contributions are becoming ratified
it is evident the private sector needs to finance the bulk of the investment needed. This is a view shared by various market
participants, see recent article in Environmental Finance by Lauren Compere, managing director at Boston Common Asset
Management: ‘After Paris, ‘banks’ need to up their game on climate change.’
Source : https://www.environmental-finance.com/content/analysis/after-paris-banks-need-to-up-their-game-on-climate-change.html
Published: September 2016
For Professional clients and Eligible Counterparties only.
All information is subject to local regulations.
Issued by HSBC Bank plc.
Authorised by the Prudential Regulation Authority and regulated by the
Financial Conduct Authority and the Prudential Regulation Authority.
Registered in England No 14259
Registered Office : 8 Canada Square London E14 5HQ United Kingdom
Member HSBC Group
Deal Pricing Date
by Quarter
Deal Value $
(Proceeds) (m)
Number of deals % rise (value
of deals)
% rise (volume
of deals)
2016 1H 33,622 37 62% -3%
2015 1H 20,737 38 91% 124%
2014 1H 10,830 17 _ _
2016 Q2 14231 22 33% 5%
2015 Q2 10684 21 132% _
2014 Q2 4613 5 _ -12%
2016 Q1 19,391 15 93% 42%
2015 Q1 10,053 17 62% _
2014 Q1 6,217 12 _
HSBC’s Sustainability Leadership Programme – ‘A Movement for Change’As part of HSBC’s broader commitment to sustainability,
we are focused on embedding this ethos into the
fabric of our corporate culture, through a senior
management engagement framework called the
Sustainability Leadership Programme (SLP).
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Looking to the future
Since 2010, 1050 Senior Managers have attended the
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If you are interested in learning more about the HSBC
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