Bloomberg Barclays MSCI Green
Bond Index Consultation
This consultation may or may not lead to the adoption of any or all of the proposals
contained in this presentation. Feedback will remain confidential.

June 2019© 2019 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.

Recap of index rules
Index Criteria
PRINCIPLE 1

PRINCIPLE 2

PRINCIPLE 3

PRINCIPLE 4

USE OF PROCEEDS:
Detailed taxonomy of eligible projects

PROJECT SELECTION & EVALUATION:
Process for determining eligible projects

MANAGEMENT OF PROCEEDS:
Process for earmarking proceeds for eligible projects

ONGOING REPORTING:
Annual reporting of use of proceeds and impacts

2

Executive Summary
Agenda• Consult on Different Bond Structures and their Eligibility Criteria‒ Green Mortgage Backed Securities‒ Pure Play Bonds• Consult on “Green” Definitions‒ Sustainable Biomass‒ Large Water Storage Dams
• Get view on additional questions
Timelines
Launch of the Consultation

28th June 2019

Time to Provide Feedback

One Month

Close of Consultation Period

29th July 2019

Announcement regarding consultation results

26th August 20193

Consultation Agenda
Proposals on Bond Structure
A. Develop Specific Criteria for Inclusion of Green Mortgage Backed Securities
B. Revise Treatment of Pure Play Bonds

Proposals on Minimum Environmental Standards
C. Biomass Should be Sustainably Sourced
D. Enhance Criteria for Large Dams for Sustainable Water projects
E. Additional Questions for Feedback4

Consultation Goals

Industrial, 3%

Asset Backed
Securities, 6%
Utility, 15%

Financial
Institutions, 12%▪

▪

Maintain the Index as a global benchmark of
the green bond market

Agencies, 24%

Supranational,
32%

Keep the Index adaptable to the new types
of issuers
Covered, 2%▪

▪

2014 Index
Composition
n=34

Account for different types of green bonds(for e.g. securitized bonds)
Account for changes in the Green Bond

Principles by ICMA

Local Authorities,
9%

Sovereign, 1%

Transport, 1%

Industrial, 4%
Utility, 18%
Asset Backed
Securities, 1%

Financial Institutions, 25%2019 Index
Composition
n=333*

Local
Authorities, 11%

Corporates,
0.3%
Treasuries, 0.3%▪

▪

Account for the evolving definitions of“green” products and services
Discuss Index alignment with different green
bond standards, particularly the recent EU
green bond standard

Supranational,
16%

Agencies, 20%*As of April 31, 2019

Regions with green bondstandards/schemes

5Consultation Agenda
Proposals on Bond Structure
A. Develop Specific Criteria for Inclusion of Green Mortgage Backed Securities
B. Revise Treatment of Pure Play Bonds

Proposals on Minimum Environmental Standards
C. Biomass Should be Sustainably Sourced
D. Enhance Criteria for Large Dams for Sustainable Water projects
E. Additional Questions for Feedback6

A. Develop Specific Criteria for Inclusion of Green MBS
PROPOSAL: Develop Specific Criteria for Inclusion of Green Mortgage Backed Securities (MBS)
Background:•

We refer to MBS that are structured to improve the energy efficiency of the underlying collateral/property as
Green MBS•In Green MBS, about 5-10% of the proceeds of the green MBS are used for energy efficiency improvements inthe property. The remaining 90-95% proceeds fund the whole property•

The issuer provides a discount on the loan to the borrower in the green MBS structure, thereby incentivizing
energy efficiency improvements•

Currently Green MBS are Index-ineligible since only 5-10% proceeds are “green” i.e. for energy efficiency
purposes•

However, these products are “impact” based and mandate energy efficiency in properties that would otherwise
not qualify as green

Questions:Green MBS raise a broader question on whether we want to include impact based products or products that are
already green.
Do you agree that we need to develop a specific criteria for inclusion of green MBS, to be included at full weight?
7

A. Develop Specific Criteria for Inclusion of Green MBS
PROPOSAL: Develop Specific Criteria for Inclusion of Green Mortgage Backed Securities (MBS)
Potential index impact:• There are 19 Fannie Mae green bonds that could potentially enter the Index if we implement
proposal that makes green MBS eligible for the Index, mandating an energy efficiency
improvement of 15-30%• These bonds would add USD 6.6 billion in market value to the Index (about 2% by market value ofthe current Index value)• Freddie Mac has launched a Green MBS in June 2019, where borrowers must reduce energy orwater consumption by a total of 30%, with a minimum of 15% of those efficiencies foundthrough energy improvements. We are still to study Index impact of inclusion of such bonds

8B. Revise Treatment of Pure Play Bonds
PROPOSAL: Remove the exemption on Principles 2 and 3 for pure play bonds
Background:•

In its 2017 update to the Green Bond Principles, International Capital Market Association (ICMA) clarified that“pure play” bonds may not follow the core components of the Green Bond Principles.

•

In order to maintain consistency with the Green Bond Principles by ICMA, and to reflect market consensus, weare proposing to remove of the exemption of Principles 2 (Project Selection & Evaluation) and 3 (Management ofProceeds) for pure play green bonds.

Question:
Do you agree with aligning Index rules with ICMA and removing the exemption on Principles 2 and 3 for pure playbonds?
Potential index impact:
As of June 1, 2019, there were four pure play general purpose bonds on the Green Bond Index amounting to 1.15% ofissuers on the Index and 0.45% in terms of index weight.

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Consultation Agenda
Questions on Bond Structure
A. Develop Specific Criteria for Inclusion of Green Mortgage Backed Securities
B. Revise Treatment of Pure Play Bonds

Proposals on Minimum Environmental Standards
C. Biomass Should be Sustainably Sourced
D. Enhance Criteria for Large Dams for Sustainable Water projects
E. Additional Questions for Feedback

10Consultation Goals
Enhance the Minimum Environmental Standards that
Bonds on the Index need to Adhere to:• Enhance methodologies to include only thosebonds that contribute to climate change
mitigation, minimization of pollution andbiodiversity conservation• Minimize negative environmental impacts that

could occur through projects funded by the bondson the Index• Discuss areas of alignment with the EU taxonomy
on sustainable finance and look at incorporating
the “do no significant harm criteria” of thetaxonomy11

C. Biomass Should Be Sustainably Sourced
PROPOSAL: Enhance criteria for biomass based power generation to explicitly mention thatbiomass should be sourced from sustainable sources (e.g.: FSC, PEFC, SBP certified; municipal,
agricultural or industrial waste) & exclude natural forest and peat
Background:•

Biomass sourced from unsustainable sources (for e.g.: peat, natural forest) is likely to have negative externalities
associated with deforestation and land degradation*•

Biomass sourced from sustainable sources like FSC, PEFC, SBP certified forests or residue like municipal waste
or agricultural waste is likely to reduce dependence on virgin forests for fuel•The current methodology does not specify the source of biomass to be used as renewable energy. All biomass iseligible as a renewable source of fuel, which may result in unsustainable sources of the fuel being fundedthrough green bonds*Source: International Union for Conservation of Nature

Question:
Do you agree with the proposal to include only sustainable biomass projects in the Index?
Potential index impact:

About 3% of bonds could be potentially impacted by this rule (as of June 1, 2019). We propose to grandfather suchbonds and implement this rule on a forward looking basis
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D. Enhance the Criteria for Large Dams from
Sustainable Water Projects
PROPOSAL: Enhance “sustainable water” criteria to exclude large scale storage
dams/reservoirs on rivers (in line with hydro criteria)
Background:•

The large hydropower criteria was introduced in the 2016 enhancement to the methodology, where dams over 15
meters in height were qualified as “large” dams and need to adhere to IFC performance standards or achieve ascore of 3 or more in the Hydropower Sustainability Assessment Protocol•

A similar principle can be applied to dams made for water storage and supply, where dams over 15 meters inheight should adhere to the IFC performance standards to maintain consistency with the hydropower criteria•

Currently, the methodology is silent about dams constructed for water supply.

Question:
Do you agree with the proposal to enhance the criteria for large water storage dams?
Potential index impact:
About 3% of bonds could be potentially impacted by this rule (as of June 1, 2019). We propose to grandfather suchbonds and implement this rule on a forward looking basis

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E. Additional Questions for Feedback
Which areas would you look at for alignment between EU taxonomy and the Index?
EU Taxonomy

Index view▪

Transportation: Only zero emission rail andpassenger vehicles, zero emission freight transportthat is not dedicated to fossil fuels are eligible▪

Hybrid vehicles or public mass transport that involvea component of fossil fuel usage (e.g Bus Rapid
Transport) are eligible and hence less than 2% by
number of bonds on the Index would meet EU
requirements, as of June 1, 2019▪

Energy efficiency: initiatives are limited to Best
Available Technology (BAT) defined by the EU Joint
Research Centre▪

Energy efficiency initiatives are not based on BAT but
are based on sectors funded (e.g. improvements inrail transport, buildings, demand side management),
less than 1% by number of bonds on the Index would
meet EU requirements, as of June 1, 2019▪

Real estate: For building renovation, 30% energy
consumption/carbon emission decrease ismandated▪

Most buildings related energy efficiency projects on
the Index target 15-30% improvement▪

Hence, about 5% by number of bonds on the Index
would meet EU requirements as of June 28, 201914

E. Additional Questions for Feedback
Which areas would you look at for alignment between EU taxonomy and the Index?
Question:

Should the Index methodology move towards alignment with the EU taxonomy?

Potential Index Impact of aligning the Index with EU taxonomy:•~21% by market value of the Index is likely to meet EU taxonomy criteria
As of June 28, 2019•

The bonds that meet would EU taxonomy are primarily those funding renewable energy and somefunding green buildings. Very few bonds meet the other criteria set by the EU, as of June 201915

E. Additional Questions for Feedback
Would you agree that CNY denominated bonds should be assessed as per Index
methodology?
• Bloomberg has been adding Chinese currency denominated bonds to the Global Agg Index in a phasedmanner• Chinese government bonds and bonds by China’s three policy banks (Agricultural Development Bankof China, China Development Bank and Export-Import Bank of China) are eligible for inclusion• Only bonds denominated in CNY are eligible• Consequently, eligible Chinese green bonds will be added to the green bond Index under the current
methodology• Currently the Chinese green bonds are subject to the same global eligibility criteria as other bonds on
the Index• The Index criteria is more stringent than the Chinese green bond guidelines, set by People’ Bank of China• Hence, with increasing Chinese issuance, green bonds that meet local China criteria may not be eligible
for the Index due to substantial differences in criteria

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E. Additional Questions for Feedback
Would you agree that CNY denominated bonds should be assessed as per Index
methodology?
China green bond guidelines currently qualify the below projects that do not meet Index green bond criteria:• Ultra supercritical or supercritical coal based CHP generator units with a capacity of no less than
300 MW• Construction and operation projects conducting coal washing and processing• Clean fuel /gasoline meeting certain standards is eligible• Hydropower construction and generation which meets requirements of Opinion of Energy Work2014 and other related documents. The ecologic and environmental protection and resettlement
action plan of the project should be assessed and approved• Construction of freight railway lines and terminals
Question:
As CNY-denominated bonds are added to the Global Aggregate index, would you agree that these bonds
should be assessed as per current Index methodology? Or, do you believe that we should make special
exceptions for Chinese bonds that align to local standards, and include them in the Index?
Potential Index Impact:
The number of bonds that would be impacted are limited: As of June 2019, three green bonds by China
Development Bank issued in 2017 for CNY 25 billion would potentially become eligible for the Index if we
treat CNY bonds according to the Chinese guidelines17

E. Additional Questions for Feedback
What should be the aim of the energy efficiency criteria?
Background:• Given the broad nature of energy efficiency projects funded, we frequently receive client and issuer
questions around exclusion of certain bonds for energy efficiency. E.g. Repsol, Terna• Some of the challenges with projects funding energy efficiency are:• It is difficult for issuers to define the percentage of efficiency gain that may be achieved prior to
project implementation• Issuers issue green bonds for energy efficiency in sectors that are not “green” (e.g. oil and gas)
• It is difficult to determine if an efficiency project is “business as usual (BAU)” for a sector or if it
goes beyond BAU requirements• Hence, in order to define the energy efficiency criteria more clearly, we would like to request feedbackon the aim of the energy efficiency criteria

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E. Additional Questions for Feedback
What should be the aim of the energy efficiency criteria?
•

Currently, the Index energy efficiency criteria includes:a.

Increasing efficiency of industrial operation, industrial automation & controls, andoptimization systemsb.

Increasing efficiency of power management, power distribution, power storage anddemand-side managementc.

Pumped storage hydro projects that meet specific criteriad.

Reducing fuel consumption of transport (e.g. electric and hybrid vehicles)e.

Sustainable transportation infrastructure (e.g. urban mass transit, efficiency
improvements of public transportation fleets)f.

Devices and systems to be used in environmentally sustainable buildingsg.

Not eligible: Corporate operational energy efficiency efforts, such as efficiency gains
in manufacturing, transporting, or distributing standard products or services

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E. Additional Questions for Feedback
What should be the aim of the energy efficiency criteria?
Question:
What should be the aim of the energy efficiency criteria?
▪

▪

▪

Advantages/Disadvantages

Fund limited sectors defined in themethodology. E.g. fund public transport,
buildings energy efficiency, smart grids.

▪

Fund only energy efficiency projects that willachieve carbon reduction in line with the
Science Based Targets across all sectors i.e.
projects aligned to Science Based Targets▪

Develop a middle path and fund:▪
Efficiency increase & carbon reductionaligned to SBT▪
Exclude negative externalities likepotential biodiversity loss. This will beassessed on a case by case basis

▪

▪

▪

▪

Adv: Clear methodology, non controversial
sectors
Disadv: Limited as type of issuers and bonds
grow
Adv: Index will include only bonds funding
contribution to low carbon transition, inclusiveof different sectors
Disadv: Some bonds may fund sectors that are
not inherently green and may have othernegative externalities (e.g. biodiversity loss)
Adv: Index will include only bonds funding low
carbon transition, inclusive of different sectors
Disadv: judgement on negative externalities
maybe subjective in some cases

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THANK YOU

21

Appendix

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A. Develop Specific Criteria for Inclusion of Green MBS
PROPOSAL: Develop Specific Criteria for Inclusion of Green Mortgage Backed Securities (MBS)
Background:• Green MBS are different from corporate green bonds. Green MBS are structured to improve the energy efficiency of theunderlying collateral/property• Typically, through a green MBS, an improvement of X% in energy efficiency is mandated by the issuer• About 5-10% of the proceeds of the green MBS are used for energy efficiency improvements in the property. The
remaining 90-95% proceeds fund the whole property• The issuer provides a discount on the loan to the borrower in the green MBS structure, thereby incentivizing energy
efficiency improvements• In 2018 and 2017, Fannie Mae was the single largest issuer of green MBS, issuing over 20 billion USD each year

Current Index methodology:• Currently, only tranches that are at least 90%
secured by “green properties” are considered
eligible (defined as certified properties, orproperties that fall within the top 15% in energy
efficiency in their home markets)• “Green incentive” MBS are ineligible as per
Index methodology• This is because the Index requires 90%
proceeds to be used for “green” purposes
whereas the green MBS use only 5-10%
proceeds for energy efficiency or green
purposes

Proposal:• Develop specific criteria for inclusion of green MBS in
the Index• For that, we will need to:• Define the energy efficiency improvements weare targeting through the green MBS• Define the percentage of proceeds that shouldbe allocated towards energy efficiency. This will
be a deviation to the current Index rule where aminimum of 90% proceeds are allocatedtowards “green” projects

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A. Develop Specific Criteria for Inclusion of Green MBS
PROPOSAL: Develop Specific Criteria for Inclusion of Green Mortgage Backed Securities (MBS)RATIONALE IN FAVOR OF PROPOSAL:• Green MBS may help improve the overall energy
efficiency of the residential housing market.
• The environmental gains of refurbishing /retrofitting older properties may outweigh the gainsof financing newer, more efficient properties.
• It is in the nature of mortgages to include the valueof the property. The current criteria are lessapplicable to MBS and exclude this growing market
segment.
• Adapting our criteria to include Green MBS would
allow for “best of breed” green impact or green
incentive products, rather than excluding this sector
entirely.

POTENTIAL DRAWBACKS OF PROPOSAL:• Only 5-10% of proceeds are dedicated for green
projects, whereas the rest of the proceeds are
funding a mortgage. This is different conceptuallyfrom the initial intent of the green bond Index.
• While the rest of the green bond Index would becomprised of bonds that have at least 90%
proceeds towards “green” projects, a green MBS
portfolio would finance a substantial component of“non green” assets i.e. multi-family residential
properties.
• This may dilute the “greenness” of the Index

Other views:• EU Taxonomy: Renovations to existing buildings are eligible if 30% reduction in energy use/carbon emissions is observed24

A. Develop Specific Criteria for Inclusion of Green MBS
PROPOSAL: Develop Specific Criteria for Inclusion of Green Mortgage Backed Securities (MBS)

Points to consider:• Should the green bond market be accessible for all types of participants, or is it okay to exclude certain types ofissuers? The Green Bond Index was originally designed the Index for corporates, financial institutions andsupranationals.
• Do we think that such “green incentive” products should be included? Or will this dilute the quality of the index?
• Is there a risk of green washing if only 5-10% proceeds are for actual green purposes, and the rest of the proceeds
are for funding a property that is not “green” by Index standards?
• Is it more important that the asset meet a high environmental standard or that it show a high level of improvement?
• What level of improvement is acceptable? E.g. 30% standard from EU, a 15% minimum standard as per Fannie Maeand Freddie Mac or 30% standard to include the highest impact bonds ?

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B. Revise Treatment of Pure Play Bonds
PROPOSAL: Remove the exemption on Principles 2 and 3 for pure play bonds
Rationale:• In its 2017 update to the Green Bond Principles, International Capital Market Association (ICMA ) clarified that “pureplay” bonds may not follow the core components of the Green Bond Principles.
• For example, a bond by a wind turbine manufacturer may be considered as “pure play” but may be used to fundcorporate activities of the issuer or “non-green” acquisitions instead of actual wind farms, defeating the spirit ofPrinciple 1 of the Green Bond Principles.
• Hence, ICMA clarified that bonds issued by companies whose business activities are exclusively focused on the green
economy (pure play) are only considered as green bonds if they are explicitly aligned with the Green Bond Principles.
Current Index methodology:• General purpose bonds issued by “pure play”
issuers (defined as defined as a legal entity withgreater than 90% of activities (as measured byrevenues) within one or more of the eligible
environmental categories) are currently exemptedfrom criteria pertaining to “Principle 2: Process forGreen Project Selection” and “Principle 3:
Management of Proceeds”.
• However they are required to report their activities
on an annual basis (“Principle 4: Ongoing
Reporting”) and may be removed from the index if
the issuer is no longer considered “pure play”.

Proposal:• In order to maintain consistency with the Green
Bond Principles by ICMA, and to reflect market
consensus, we are proposing to remove of the
exemption of Principles 2 (Project Selection &Evaluation) and 3 (Management of Proceeds) for
pure play green bonds.

Bonds potentially impacted:• We propose introducing this new rule on a going-forward basis to minimize index turnover• As of June 1, 2019, there were four pure play general purpose bonds on the Green Bond Index amounting to 1.15% ofissuers on the Index and 0.45% in terms of index weight.
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