Br

The state of the market in

E

LT

UR

E AND F

O

TR

R

DI

Tio

n

A N S P O RT

AGR

T RY

IC

ES

U

2016

azilian

B o nds a nd
C l imate Ch a n ge

DUIL

AND IN

BU

GS

RY

694

IN

ST

D

W AT E R

POL

LUTIO

ENERGYNNTROLWA S T E

N

D

CO

A

A$
billionclimate-aligned
bonds universe

M

Preparedby Climate Bonds Initiative.
1 Bonds and Climate Change, July 2016

UL

T I-S E C TO

R

Commissioned by HSBC.

Reviewed by SITAWI
www.climatebonds.net

A $694bn Climate-Aligned Bond Universe
Our research estimatesthat there are $694bn
of climate-aligned
bonds outstanding,an increase of $96bn
on last year’s report.
This is our 5th annual State of the Market
report. The report, commissioned by
HSBC, discovers and quantifies bondsthat are being used to finance low carbon
and climate-resilient infrastructure:climate-aligned bonds. This includes
labelled green bonds with use of proceeds
defined and labelled as green, as well
as a larger universe of bonds financing
climate-aligned assets that do not carry agreen label. Together, these make up our‘climate-aligned’ bond universe.
The $694bn is made up of approximately
3,590 bonds from 780 issuers across our
climate themes: Transport, Energy, Buildings& Industry, Water, Waste & Pollution Control
and Agriculture & Forestry. It includes$118bn of labelled green bonds.
The $96bn increase on last year is from:$94bn new bonds from existing issuers
Plus: $85bn from new issuers
Minus: $83bn matured bonds andissuers that have dropped out

Methodology
To find unlabelled bonds, we screened
Bloomberg issuer data and reviewed over
1,700 issuers to identify those with over
95% of revenue derived from climatealigned assets; thus all of our unlabelledissuers are pureplay companies. We
included all bonds from these issuers
issued after 1 Jan 2005, the year the
Kyoto Protocol was ratified, and before
31 May 2016.
Our screening criteria are based on work
undertaken through the Climate Bonds
Standard. Our screening process is notalways able to apply the full Criteria due toinsufficient granularity of information.
The Criteria are continually expanding toinclude new sectors and updated based on
emerging research. This evolution meansthat some issuers drop out and others fall
into the database. We have also updated
our research process to improve the datain our climate-aligned universe.
2 Bonds and Climate Change, July 2016

What’s new?
This year we carried out more detailed
research in three areas:

Contents
Climate-Aligned Universe

4

1. US municipal bond market: wesearched through 1,000 individual bondprospectuses from the past two years tocatalogue climate-aligned US municipal
bonds (page 16).

Labelled Green Bonds

6

Transport

8

Energy

9

Water

10

2. Chinese unlabelled green bond market:
we checked our data against data sharedby the China Energy Conservation &Environmental Protection (CECEP) andChina Central Depository & Clearing Co.
(CCDC) (page 17).

Buildings & Industry

11

Waste & Pollution Control

12

Multi-Sector

12

Agriculture & Forestry

13

Future Themes13

3. Water utilities: we looked to see whichwater bonds could meet the Climate
Bonds Water Criteria (page 10).

Regional Analysis

14

Brazil16

US Municipal Market

20$694 billion is the beginninglabelling is key to growth

China

21

A Solid Foundation for Growth22

While the $694bn provides a good pictureof current climate-aligned investmentin the bond market, even this does notshow the full potential for future labelledgreen bond growth. Labelled green bonds
are primarily issued by non-pureplay
companies whereas the 83% of theclimate-aligned universe that is unlabelled
comes from pureplay issuers only. The
labelling of green bonds is therefore
essential to shift fixed income investment
towards climate change solutions.

Institutional investors play a
crucial role
At the 2015 COP21 in Paris, 188 Parties
presented their national plans to try tokeep global temperature rise this century
below 2 degrees Celsius.
These plans will require a mix of public
and private sector capital - especially
the $100tn institutional investor sector.
Fortunately, at the same COP, institutional
investors representing $11.2tn undertook
to work to grow a green bonds market3;
and the insurance industry re-iterated its
commitment to increasing by 2020 by afactor of 10 its climate smart investments.
The Bank of England’s Prudential Regulation
Authority has also recommended green
bonds as a climate-related investment
opportunity for UK insurance firms4. Finally,
there is growing interest in climate-aligned
investment from PRI signatories (1,525 todate, with $60tn under management) andfrom other investor groups.

Climate opportunity
While a $694bn universe isencouraging, it is small in the context
of what is required to remain within a
2-degree scenario. According to theInternational Energy Agency (IEA),
cumulative investment of $53tn
is required by 2035 in the energy
sector alone while New Climate
Economy estimates that $93tn ofinvestment is required across thewhole economy by 20301.
To put this in context, the global
bond market currently stands atapproximately $90tn2. The bondmarket is therefore an essential tool
to finance the transition to a lowcarbon economy. The growing green
bond market will continue to be an
important part of this transition but it
is not the whole picture – there are arange of unlabelled climate investment
opportunities in the bond market
which are captured in this report.
Notes:• The total ‘climate-aligned bond universe’ includes
both labelled green bonds and unlabelled bonds.
• $ refers to USD unless otherwise stated.
• YTD = year-to-date
1. http://2014.newclimateeconomy.report/finance/
2. http://www.bis.org/publ/qtrpdf/r_qt1606_charts.pdf
3. http://www.climatebonds.net/files/files/Paris_Investor_Statement_9Dec15.pdf
4. http://www.bankofengland.co.uk/pra/Documents/
supervision/activities/pradefra0915.pdf

www.climatebonds.net

Labelled green bonds account for 17% of our climate-aligned bond universe$118bnLabelled Green bonds$576bnUNLabelled Climate-Aligned bond S

Key Takeaways• The climate-aligned bond market amounts to $694bn outstanding• Labelled green bond market stands at $118bn outstanding (17% of total)• $576bn outstanding is currently not labelled as green but is climate-aligned• At 67%, low-carbon transport is the dominant theme
It’s a long dated market: 70% of bonds have tenors of 10 years or more

3 Bonds and Climate Change, July 2016www.climatebonds.net

Overview of the Climate-Aligned Bond Universe
The $694bn climatealigned universe ismade up of six climate
themes that will enablea transition to a low
carbon and climateresilient economy.
Transport is the largest theme in theuniverse, making up 67% of all bonds
outstanding (more on page 8). Energy is
the second largest, accounting for 19% of
the amount outstanding.
Between them, Water, Buildings & Industry,
Waste & Pollution Control and Agriculture& Forestry make up 6% of the universe.

Transport and Energy are the largest climate themes
Waste & Pollution Control 0.7%
Agriculture & Forestry 0.9%
Buildings & Industry 2%
Water 2.6%
Multi-sector 8.2%

Energy18.8%

The ‘multi-sector’ theme, which
accounts for 8% of the universe,
is made up entirely of labelled green
bonds that each finance a range of
projects and assets across the six
themes and can therefore not beallocated to a single theme.

Transport
66.8%

Scaling up investment
In order to remain within a 2-degree
world, bonds will be an essential tool inscaling up investment across all themes.
But it’s important to note that bonds havebeen utilised more in some sectors thanin others. This is based on the maturityof the technology and the suitability ofassets to bond financing. Rail assets,for example have been financed using
bonds for decades (hence their largepresence in our data), while relatively few
bonds are issued by companies within
the agriculture and forestry sector. As
renewable energy technologies mature,
we expect to see more bonds from theEnergy theme.

78% of the climate-aligned
universe is investment grade
Investment grade issuance is classified
as BBB- or higher. The largest ratingsband is AA, which makes up 37% of
the bonds outstanding and includes
large rail entities such as China Railway
Corp, the UK’s Network Rail andFrench state-owned rail company SNCF.
This is different to the labelled green
bonds market (see page 6-7) where
43% of issuance falls within the AAA
rating category.
4 Bonds and Climate Change, July 2016

The transport theme accounts for 70%of the investment grade segment of theuniverse - just above its overall proportionof the universe. Energy accounts for 15%
of investment grade bonds, slightly under
its overall proportion of the climatealigned universe. 85% of the multi-sector
theme is investment grade with theremaining 15% unrated.
The high-yield (BBB- or lower)
segment is currently small making
up less than 6% of the universe.
As a comparison - high-yieldbonds made up approximately
21% of issuance in the
US corporate bond market
in 20155.
The average coupon within
the high-yield segment of
the climate-aligned bondmarket was 6.9%, whilst
in the investment grade
segment, the average coupon
was approximately 3.7%.
16% of outstanding climate-aligned
bonds do not have a rating.

Some of these are from small issuers which,if rated, would likely be sub-investment
grade while others, such as the USA’s
Overseas Private Investment Corp, would
likely fall into a high rating band.

78% of the universe isinvestment grade
No Rating
16%

AAA
15%

<BBB
6%
BBB
10%

A
16%

AA
37%

5. http://www.sifma.org/research/statistics.aspx

www.climatebonds.net

For the first time this year, theIndian Rupee (INR) made it into
the top 10 currencies with 2%of total issuance.

Chinese-based issuers also issued
approximately $2bn in USD-denominatedbonds on offshore exchanges.

Approximately 70% of bonds in the
climate-aligned universe have tenorsof 10 years or greater. This is in contrast
to the labelled green bond market where
50% have tenors between 5-10 years(page 6).

Over 68% of bonds issued are between$100m and $500m in size. The averagebond size within the unlabelled climatealigned universe was $196m. Over 44%of the bonds issued were greater than
$200m in size, indicating plenty ofbenchmark size investment opportunities
available to investors.
Bond size thresholds for indicesvary between index types andcurrencies. Typically, thresholds arearound $200m.
In general, bonds within the transport
theme tended to be the largest, with anaverage issuance size of over $400m
while the average bond in the energy
theme is $135m.

bn

$3

$4

00

00

bn

bn

bn
00

5-10

•
•
•
•
•
•

3-5
1-3
<1

AAA
AA
A
BBB
<BBB
No Rating

Bond tenors (years)

The majority of climate-aligned bonds are between$100m and $500m in size
Number of bonds
1,200

•
•

1,000

Unlabelled climate-aligned bonds
Labelled green bonds

800
600
400
200
0
0-$10m

5 Bonds and Climate Change, July 2016

Amountissued>10

In the climate-aligned universe, ratingsbands are fairly consistent across eachtenor range although AA bonds make up
the majority of bonds with tenors greaterthan 10 years.

The majority of bonds arelarger than $100m$1

The majority have tenors
longer than 10 years

CNY$244.6 bn

The majority of bonds have tenors of 10 years or morebn

As in previous years, over 60% ofbonds outstanding was issued by agovernment entity - local governments,
multilateral development banks,
agencies or state-owned entities.
This group of issuers includes thelargest issuer in the universe- China
Railway Corp as well as Network Rail,the EIB, EUROFIMA and the New York
Metropolitan Transportation Authority.

EUR$111.2 bn

GBP$58.2 bn

CAD $18.7 bn
RUB $16.9 bn
INR $15.2 bn
KRW $14.5 bn
CHF $12.7 bn
SEK $7.9 bn
Others $24.8 bn$0

The majority of issuance isfrom government entities

USD$169 bn00

35% of bonds are denominated in
Chinese RMB, the vast majority ofwhich are onshore bonds. Less than
$0.5bn of the $239bn outstanding
were ‘dim sum’ bonds; i.e. RMB bonds
issued offshore.

The universe is made up of abroad range of currencies

The other two largest currencies are
USD (23%) and EUR (16%), bothbeing common currencies for issuers inemerging and developed markets.

$2

There is a broad spreadof currencies$10m$100m$100m$200m$200m$500m$500m$1bn$1bn +

www.climatebonds.net

Labelled Green Bond Issuance is Growing

Labelled green bonds are bonds with useof proceeds earmarked to finance newand existing projects with environmental
benefits. Green bonds make up 17% of
our $694bn climate-aligned universe, up
from 11% in our 2015 report*.
A green bond label is a signalling or discovery
mechanism for investors. It enables theidentification of climate-aligned investmentswith limited resources for due diligence.
By doing so, a green bond label reduces
friction in the market, thereby facilitating
growth in climate-aligned investments.
Green bond indices have also greatly
contributed to reducing friction by
giving investors a means to evaluate
performance and assess risk. Labelled
Green Bond Indices include: S&P Dow
Jones, Solactive, Barclays MSCI and Bankof America Merrill Lynch.

Corporate and muni bonds make up
a growing proportion of issuance$40 bn$30 bnThe European Investment Bank (EIB) has
issued the largest amount of green bonds todate (over $17bn) and was the largest issuer
of green bonds in both 2014 and 2015.
Development banks have also played
an important role, more recently, as
cornerstone investors for labelled green
bonds. For example, KfW has an explicit
mandate in Europe while IFC has taken
large investments in India’s PNB Housing
Finance green bonds.
* Note: Labelled green bond figures may differ fromother databases due differences in: inclusion criteria,
exchange rates and cut-off dates

6 Bonds and Climate Change, July 2016

Bank
CorporateABS
Muni
Development Bank

$20 bn$10 bn

$0 bn
2012

2013

82% of the labelled green bondmarket is investment grade2015 was another record year for thelabelled green bond market, with over
$42bn issued. 2016 is set to reach newheights with over $28bn issued up to theend of May 2016. We estimate that 2016
issuance could reach $100bn.
Development bank issuance has
increased year-on-year and new issuers
have joined the market. While theproportion of development banks as apercentage of the market has decreased
since the first corporate green bonds were
issued, development banks remain large
issuers and are important in meeting
demand for AAA-rated bonds.

•
•
•
•
•

2016 estimate: $100 bn

The labelled green bondmarket continues togrow year-on-year andcurrently amounts to over
$118bn outstanding.

<BBB 4%

No Rating
14%

2015

2016
YTD

Labelled green bond tenors
are shorter than unlabelledclimate-aligned bonds
100%< 3 years

80%

5-10 years< 3 years
3-5 years

60%
AAA
43%

BBB
9%
A
15%

2014

5-10 years
40%> 10 years

20%
AA
15%

> 10 years
0%
Unlabelled climate- Labelled greenaligned bonds
bonds

Corporate bond and commercial bankbond issuance continues to grow. We
expect this trend to continue, with newissuers entering the market each year.
Over 45 different corporate and bankissuers issued green bonds in 2015, up
from just over 30 in 2013 and fewer than
10 in 2012.
The first municipalities issued green bonds
in 2012, but it took until 2014 for labelledgreen bonds to come from the US muni

market. We have since seen increasing
issuance from municipalities and cities
both inside and outside of the US and we
expect to see more; this is covered in moredetail on page 16.
The average tenor of labelled green
bonds is between 5-10 years. This is incontrast to unlabelled climate-aligned
bonds where long tenors are morecommon, with 70% having tenors of
10 years or more. This is due to thewww.climatebonds.net

The green bond market covers a wide range of sectors

dominance within the climate-aligned
universe of large state-backed entities
in the rail sector where investment
horizons are long.

Buildings & Industry 9.2%
Transport 7.3%
Water 6.2%
Waste & Pollution 0.4%
Agriculture & Forestry 0.1%

43% of the bonds outstanding fall into
the AAA credit ratings band, primarily
due to large development banks such as
the World Bank, IFC and the EIB.

A broad range of use of proceeds
Labelled green bonds are used to financeprojects in a range of themes, with Energy
and Buildings & Industry being the largest.
Multi-sector makes up 49% of the market
and comprises bonds with a mixed use ofproceeds for a variety of projects. While
we do not have project level data for eachof the multi-sector bonds, we estimatethat the Energy and Buildings & Industry
themes make up an equal proportion of
their use of proceeds, with 15% each.
Transport is a relatively small theme inthe labelled bond market when compared
to its large share in the climate-aligned
universe as bonds solely for transport
projects are a more recent feature of thegreen bond market. Toyota’s 2014 ABS,
which financed loans for electric andenergy efficient vehicles, was the firstgreen bond solely for transport. Since
then we have seen the entry of transit
authorities such as Transport for London
in 2015 and, in 2016, the large New York
Metropolitan Tranportation Authority.
USD and EUR currencies make up over
80% of issuance. This is in contrast to
the climate-aligned bond market, where
the currency spread is more balanced andincludes a greater number of emerging
market currencies. There are 25 currencies
represented in the labelled green bondmarket.
We expect to see more RMB issuance as
the Chinese government aims to make
China the largest source of issuance

bn

USD
EUR
RMB
SEK
GBP
CAD
AUD
ZAR
BRL
NOK
Others7 Bonds and Climate Change, July 2016

Buildings& Industry 15%

Multi-sector
49%

Transport 6%

Energy27.8%(see page 17). Thus far, 2016 has beena bumper year for Chinese issuers with
Shanghai Pudong Development Bank
issuing two of the largest green bonds ever(at $2.3bn and $3bn), making China thelargest issuing country in 2016 ytd.

Standards can help to boost
the market
The rapid growth in the green bond market
over the past 3 years has been met withquestions around the environmental claimsof these bonds. In the absence of clear andwidely accepted definitions around what isgreen, many investors have raised concerns
about ‘greenwashing’, where bondproceeds are allocated to assets that havelittle or uncertain environmental value. Thiscan both shake confidence in the market
and hamper efforts to finance a transition
to a low carbon economy.
The Green Bond Principles (GBP), external
reviews or opinions and the Climate
Bonds Standard scheme are tools to
address greenwashing.

0
$5

$0

bn

USD and EUR denominatedbonds make up 80% issuance

Energy 15%

The GBP were launched in 2014 by agroup of banks to bring clarity to theprocesses and transparency associatedwith green bonds. The four voluntary
principles primarily relate to the process
of issuance, disclosure and reporting,while the questions of ‘what is green’ isaddressed by third parties.
Bonds that have received an external
review make up approximately 60% of
the labelled green bond market - this hasremained relatively constant year on year.

Water 5%
Waste & Pollution 4%
Agriculture & Forestry 2%
Adaptation 2%External reviews play an important role inthe market and could be reinforced further
with more consistent standards.
The Climate Bonds Standard Board
oversees criteria development andcertification for the labelled green
bond market. It convenes scientists,
investors and other specialists in expert
committees, to develop criteria for assets
and projects that can be financed withgreen bonds. The benefit of the Standard
is that it provides clear, science-based
criteria on what is green. The Standard isaligned with the requirements of the GBP.
Throughout this report, we have detailed
the current progress of specific Criteria
development for the Standard - this canbe found in the overview of each theme on
pages 8-13.

59% - 66% of green bonds havereceived an external review$50 bn$40 bn••No review
External review$30 bn$20 bn$10 bn
$0 bn
2013

2014

2015

2016
YTD

www.climatebonds.net

TR

A N S P O RT

Transport$464bn outstanding

Rail dominates thetransport theme, making
up 93% of the overall
amount outstanding.
Transport remains the largest theme in the
climate-aligned universe. Rail bonds makeup the vast majority of issuance but a diverse
range of other sectors are also represented.
China Railway Corporation is the largest
bond issuer ($194bn) and has been
responsible for the huge expansion of highspeed rail in China. China now has morehigh speed rail than the rest of the worldcombined, transporting more than 6 million
people every day.
The UK’s Network Rail is the second largest
issuer overall ($40.3bn) with issuancebeing buoyed by recent rail infrastructure
modernisation. France’s national rail
company SNCF was another major issuer($34bn). American freight rail made up asignificant share of rail bonds in our data;
Burlington North Santa Fe ($17.7bn), Union
Pacific ($11.9bn) and Norfolk Southern
Corp (7.5bn) were the three largest freightrail bond issuers.
Transportation authorities account fora large source of bond issuance. These
are distinct from rail companies as they
are government bodies that may provide
multiple forms of public transit; such as bus
rapid transit or metro. London’s TfL is thelargest with $4.8bn outstanding, New York’s
Metropolitan Transportation Authority(MTA) was also a major issuer ($3.6bn).

1,605 climate-aligned bonds
148 issuers
Largest issuer: China Railway Corp

A range of other unconventionaltransport bonds also exist. The theme
contains a number of bonds fromsmaller issuers which form an interesting
constituent of the transport bond market.
For example, bicycle manufacturers Ideal
Bike and Sun Race Sturmey-Archer or
Chaowei which develops batteries forelectric bikes.

Climate Bonds Standard
The Criteria for Low-Carbon
Transport were finalised in 2016.
They set out which projects areapplicable for certification based onwhether or not they are compatible
with an emissions trajectory that
limits global temperature rises to 2
degrees. Applicable assets are:Public passenger transport,
Private light-duty and heavy goods
vehicles that are electric, hybrid oralternative fuel,Dedicated freight railway lines andsupporting infrastructure.
Fossil fuels, in particular coal,form a major part of rail freight.
In recognition that coal freight
may be required to make railways
economically feasible during thetransition to a low carbon economy,
the Criteria allow up to, but notexceeding, 50% of eligible rail freightand infrastructure to be used totransport coal.

Rail makes up 93% of the transport theme
Other
EE vehicles

Bus
Rail 93%

Others 7%

Transit

8 Bonds and Climate Change, July 2016

Electric and energy efficient vehicles area burgeoning source of climate-aligned
bonds. Electric car manufacturer Tesla
Motors is a major issuer with $2.9bn
issued to fund its electric car business.
Tesla is the only auto manufacturer in our
climate-aligned dataset which has not issued
a labelled green bond. This is because mostauto manufacturers produce a diverse range ofvehicles, only a few of which meet our criteria.

Labelled green bonds($8.6bn outstanding)
The US municipal market was an areafor growth in green transport bonds.
Since our last report there havebeen several large transport-related
labelled green bonds. Notably New
York MTA issued a $782m green
bond certified under the Climate
Bonds Standard in February 2016.
The bond finances rail infrastructure
in New York City and proved agreat success, especially with local
retail investors.
Washington State’s Puget Soundissued the largest municipal green
bond of 2015, which totalled $943m,
for the Seattle regions public transit
investments. Puget Sound received
a second review from Sustainalytics,
a key move in the US muni market
where second reviews are not acommon feature.
Auto manufacturers are a small but
growing area for labelled green bonds.
Toyota came to market with a green
ABS to finance leases and loans for
new low carbon vehicles in 2014 andhave issued two labelled green bonds
since then. In 2016, Hyundai issued
a $500m green bond for hybrid andelectric vehicles, while Chinese car
manufacturer Geely issued a green
bond for the manufacture of hybrid
London taxis.
Currently, some vehicles included inlabelled green bonds issued by auto
manufacturers would not be eligible
under the Climate Bonds Standard
but have been included in the reportas they represent current bestpractice within the sector.
www.climatebonds.net

W indEnergy1,120 climate-aligned bonds
400 issuers
Largest issuer: Hydro-Québec$130bn outstanding

With global energy
demand rising, energy
is at the forefront of thetransition to a low-carbon
and climate-resilient
economy. Energy is thesecond largest themein the climate-aligned
universe, with $130bn
outstanding.
This theme is made up of a diverse
range of renewable energy assets. Whilebonds have been used to finance maturetechnologies such as hydropower for
decades, there is increasing issuance fornewer technologies.

Hydropower makes up 32% of thistheme. Large hydropower plants arecontroversial due to the methane leakage
that can take place when areas areflooded to create reservoirs. These typeof emissions seem to be particularly highin tropical zones, and for this reason,
we have excluded hydropower projects
with reservoirs in these areas from ourdataset. Inclusion in future reports will
depend on the outcome of ongoing
discussions as part of the development of
the Hydropower Criteria of the Climate
Bonds Standard (see box).

Solar and wind accountfor approx. 30% of theenergy theme

The solar sector is dominated by large
solar pureplays: such as SolarCity,
SunPower and SolarWorld. Also included
are large project bonds issued by Solar
Star ($1.3bn) and Topaz Solar ($1bn).
SolarCity is the largest solar issuer inour dataset and is also a labelled green
bond issuer. It is the largest solar rooftop
contractor in the US, selling about one
third of total residential solar installations.
Conventional energy companies are also
developing renewable assets throughbond financing. For example, our largest
wind issuer is Huaneng Renewables(a subsidiary of Huaneng Group), oneof the largest coal-based electric utility
enterprises in China. Voltalia Energia
issued one of the few recent projectbonds; a $122m BRL-denominatedbond in March 2016. This 19 year bondfinances a wind development in Sao
Miguel do Gostoso, Brazil. It comprises
four wind farms totalling an installedcapacity of 108 MW.
It should be noted that nuclear
has been included in our data (4%of outstanding climate-aligned energy
bonds), due to its potential fit withina low-carbon economy. However,
we recognise there are controversies
associated with this technology.
9 Bonds and Climate Change, July 2016

Wind
11%
Solar
18%

Criteria for wind, solar and geothermal
have been released and are available
for Climate Bond Certification.
Other criteria in this theme are
currently in development, including:
Bioenergy: Draft Criteria havereceived public comments; these arebeing reviewed prior to submission to
the Standards Board for approval.
Marine Energy: Work commenced
April 2016 and includes wave andtidal power.
Hydropower: Work commenced
under the Water Criteria
development process and is currently
being developed further to capturehydro-specific factors.

Energy Efficiency 6%

Wind and solar specific bonds make up
29% of the theme; they also contributed
to the ‘mixed renewable energy’ segment.

Climate Bonds Standard

Labelled green bonds($33bn outstanding)
Hydro
32%

Mixed Renewable
Energy29%
Nuclear 4%
60% of the Energy theme is investment
grade. A large amount of bonds (32%)
fall into the A ratings category, due inpart to large hydropower companies
such as Hydro-Québec. Within the‘mixed renewable energy’ segment, athird of outstanding bonds have received
an AAA rating. Within the hydropower
sector, 88% of bonds are issued bysovereign entities. This is in contrast to
the solar and wind sub-categories, where
it’s only 8%.
36% of outstanding solar bonds and
60% of wind bonds have a tenor of 10
years or more. 70% of issuance was in
USD ($41.8bn), RMB ($23.3bn) and EUR($23.2bn), with bonds being issued in 21
different currencies.

The majority of labelled green
bonds have been linked torenewable energy projects. The
green bond market first developedwith renewable energy and energy
efficiency projects and they remain
well understood in the investor
community. German developmentbank KfW is one the largest green
bond issuers in the energy theme,with over $8bn issued for renewableenergy projects.
There are a range of issuer types
in this theme, including energy
utilities, banks with energy assets on
their loan books and asset backed
issuances. Some of the early issuers(such as EDF), have returned to thegreen market after the success of
their initial green issuance.
In 2016, the Asian Development
Bank facilitated the issuanceof the first green bond from thePhilippines. This took the formof a 75% guarantee for a $225.7m
green bond from AP Renewables.
The use of proceeds financed
geothermal projects and received
Climate Bonds Certification.
www.climatebonds.net

W AT E R

Water

$18bn outstanding

Water-related assets
make up a significant shareof the capital investments
in both developed andemerging economies.
As the global climate changes, drought,
floods and other extreme weather
conditions are likely to increase infrequency and severity, putting pressure
on water utilities. Water infrastructure thatis able to cope with more extreme andunpredictable weather patterns is an
important investment for the future.
Despite their importance, identifying
climate-aligned water bonds remains
challenging, thus they account for asmall proportion of the climate-aligned
universe. We do not consider waterbonds to be ‘green by default’. To be
included, infrastructure needs to be
climate-resilient. This requires thoroughdisclosure; a feature that is not yet
common across water utilities andClimate Bonds Standard
This year sees the developmentof the new Water Climate Bonds
Criteria which provide a clear
definition of which investments
are consistent with improving theclimate resilience of water assets.
These criteria will help bond investors
quickly determine the environmental
credentials of water-related bonds.

authorities.
Bonds have been split up into a numberof subsectors. Water treatment focussed
on bonds used to fund waste and drinking
water upgrades, which are particularly
popular in the municipal bond market.
Flood protection included investment
in levees, storm sewers, sea walls andother flood defences. Bonds from Dutchbank Nederlandse Waterschapsbank
were put in this subsector as its bonds
were partly used to fund a scheme
set up by the Dutch government
to upgrade water management andflood protection in anticipation of
future climate shifts.
The smallest subsector was conservation
and restoration focussing on therestoration of natural water and theconservation of water supply. For example,
Cadiz issued a water recovery and storage
project in the Southern Californian desert.
More general water authority adaptation
upgrades were included under theumbrella of climate resilience.
UK-based Anglian and Severn Trent
Water Authorities’ bonds were
included in the theme for their efforts
to implement detailed and extensive
climate adaptation plans. We researcheda large number of water authorities,
but most did not provide enough specificdisclosure on climate adaptation to be
included. However, we note that they arepotentially making investments that would
qualify if disclosed.

In a nutshell, the Water Criteria
encompass investments in engineered
water infrastructure for water collection,
treatment and distribution.

Use of proceeds

Investment can be certified under the
Climate Bond Standard if they:

Flood
Protection
26%

Deliver greenhouse gas mitigation
Promote adaptation to climatechangeFacilitate increased climate
resilience in the social, economicand environmental systems that
underpin and are affected bywater assets
10 Bonds and Climate Change, July 2016

153 climate-aligned bonds
84 issuers
Largest issuer: Anglian Water

ClimateResilience
57%

Water
Treatment
14%
Conservation &Restoration 3%

Climate-aligned water bonds
tend to be low risk, investment
grade bonds
No Rating 3%

BBB
21%

A
24%

AAA
32%

AA
21%

Labelled green bonds($7.4bn outstanding)
There have been several labelledgreen water bonds out of the US.
An early issuer was DC Water, whocame to market with a second review
from Vigeo and have subsequently
returned to the market in 2015 with a$100m issuance.
Many labelled green water bonds
have been issued by state level waterauthorities in the US –though no otherhave a second review.
Authorities with green bonds include
Massachusetts Clean Water, Indiana,
New York, St Pauls, Connecticut and
New Jersey. The common concern
with the labelled US municipal green
bonds is the low levels of disclosure
on climate resilience in the waterauthorities’ overall investment plan. If
this disclosure is missing and there is
no review from an independent party,
it is difficult to determine how aligned
these green bonds are.
One bond which stands out in thisregard is the 2016 San Francisco
Public Utilities Commission’s $240m
green bond for water. It was certified
under the Climate Bonds Standard.
Recent droughts have put water issues
at the top of the agenda in California
and certified green water bonds arepart of the financing solution.
www.climatebonds.net

BU

ILDINGS

Buildings& Industry$14bn outstanding
The Buildings & Industry
theme chiefly comprises
bonds used to fund lowcarbon buildings (LCB).
The Buildings & Industry theme captures
bonds financing improvements in energy
efficiency in buildings or products.
67% of bonds in this theme are linked
to LCB, 79% of which are labelled green
bonds (see box). The largest issuer in thistheme was Unibail-Rodamco, Europe’s
largest listed real-estate company (allissuance was labelled green bonds).
The French property developer Société
Fonçière Lyonnaise, which has 100% of its
property portfolio BREEAM-certified, wasthe second largest issuer.
To identify unlabelled green bonds linked
to green buildings, we used LEED &BREEAM certification schemes as key
criteria. We also included REITS (Real
Estate Investment Trusts) and companies
with more than 95% of their revenue
generating assets certified at BREEAM Goodor above or at LEED Gold or above. In our
analysis, nearly half of the outstanding LCB
bonds have tenors of 5 years or more.
While the theme also includes
manufacturers of products and technologies
that improve energy efficiency (LEDlighting, insulation etc.), such bonds remaindifficult to capture in our methodology as

70% of the theme isrepresented by LCB
Energy Efficiency 5%

Mixed
15%

LED
10%

113 climate-aligned bonds
66 issuers
Largest issuer: Unibail-Rodamco

products tend to be made by diversified
manufacturers whose range of products
make them ineligible for inclusion. The few
that are included are manufacturers of LED
lighting such as Acuity Brands Lighting andEverlight Electronics.

Labelled green bonds($11bn outstanding)Due to a tightening of our criteria thisyear, the size of the theme has decreased
by around $8bn. The majority of this isdue to LG Electronics dropping out; it
was included in previous reports for its
high percentage of products that met
Energy Star ratings in comparison with its
peers. LG Electronics and others were notincluded in the universe as energy efficient
products have become more standard in
the consumer markets and best practice is
no longer easy to identify. This could be a
future area of work.

Vasakronan issued the first corporatebond linked solely to LCB in 2013.
They have continued to issue green
bonds as others have joined themarket, including Unibail-Rodamco(and its subsidiary Rodamco Sverige)
which is the largest issuer to date with
$1.8bn currently outstanding.

We also hope that future reports will
include bonds linked to industrial energy
efficiency - this will be driven by the workof the Climate Bonds Standard.

Climate Bonds Standard
The Climate Bonds Criteria for LCB
were released in 2015 and focus on
the energy efficiency upgrades ofcommercial and residential buildings,
as well as efficiency upgrades.
Assets are eligible if their energy
efficiency is in the top 15% ofcomparable buildings in the same city,or if the investment would lead to verysignificant increases in energy efficiency.
To expand the roll-out of certified
bonds, we are working with partners
to establish these 15% thresholds foreach city.
However, determining the energy
efficiency of buildings remains
challenging, due to data availability.
For this reason, the Criteria also allow
for certification of buildings assets thatmeet approved building codes. These
serve as proxies for this 15% thresholdand include BREEAM and LEED.
Industrial Energy Efficiency out soon

Low Carbon Buildings
70%

11 Bonds and Climate Change, July 2016

A Technical Working Group to develop
Climate Bonds Criteria for industrial
energy efficiency will be launched insummer 2016.

79% of bonds in this theme arelabelled green bonds, the majority ofwhich are financing LCB.

Australia’s ANZ Bank was the firstto issue a bond certified using the
Climate Bonds LCB Criteria in May
2015. A number of others havefollowed including ABN AMRO
(Netherlands), Axis Bank (India),
Westpac (Australia) and Obvion(Netherlands).
It is not just corporates that are
issuing green bonds. US munis
have more recently entered themarket with bonds to improvethe energy efficiency of academic
institutions such as Massachusetts
Institute of Technology and Universityof Texas.
The $11bn of labelled green bonds
represented in this theme does
not capture multi-sector bonds withan energy efficiency component tothem. Over 94% of bonds in theMulti-sector theme (see page 12)
have an energy efficiency or LCB
component to them, although it ishard to estimate what is actually
allocated on such projects. This
includes World Bank green bonds
where Buildings & Industry projects
include an energy efficient lightbulb exchange scheme in Mexicoand energy efficiency programs in
paper, cement and manufacturingindustries in China.
We expect to see more bonds
issued to finance industrial efficiency
projects once Criteria on such projects
become clearer. The Climate Bonds
Initiative’s Criteria development
should help to clarify issues andboost issuance.
www.climatebonds.net

POL

LUTIO

N
NT

WA S T E

A

D

CO

N

ROL

Waste & Pollution
Control$4.8bn outstanding

The Waste & Pollution
Control theme captures
bonds linked to recycling,
resource recovery andwaste to energy (WTE).
It is the smallest theme in this year’s
report. This is partly due to how wesplit the themes up, with, for example,
wastewater treatment going into thewater theme. It is also because large
bond issuers linked to waste disposal
make use of a diverse range of waste
disposal methods (including landfill
without gas capture) which are excluded
in our criteria.
36% of the outstanding issuances arelinked to WTE projects. These projects

Climate Bond Standard
There are currently no clear inclusion areas
for waste and pollution assets in any otherrecognised green bond guidelines. This
makes it more challenging for issuers
and investors. However, developmentof Climate Bonds Standard Criteria forwaste management assets and projects
is scheduled to begin in summer 2016.

M

UL

TIS ECTO

R

have varying reputations in different
markets. In Europe, where projects tend
to be newer, they are seen as ‘green’
whereas in the US, projects are older
and are often seen as dirty. This makes it
difficult to develop inclusion criteria forthis report, as the age of the plant andthe technology used is key to determining
its environmental credentials; thisinformation is often not available.
We have, however, included all WTElinked bonds we found as our cut-off
date is 2005. It is likely that bonds being
issued after this date will be linked tonewer technologies. In our analysis,
nearly half of the outstanding WTE
bonds have tenors of 10 years or more.
The other main use of proceeds is forpure-play recycling companies dealing
with metal, paper or products. Issuers
include Canadian company Cascades
which manages recyclable material andmanufactures recycled packaging.
After a careful analysis of last year’s
database, Klabin, the Brazilian paper
manufacturer and recycling company
dropped out as it had less than 95% of its
revenue climate-aligned. In the future, wewill look for progress on the increase of its
renewable energy assets, on the recycledcontent percentage and on its disclosure.

Multi-sector$57bn outstanding

This sector is comprised
entirely of labelledgreen bonds with mixed
use of proceeds.
The theme includes all the multilateraldevelopment banks, such as theEuropean Investment Bank (EIB),World Bank and IFC, whose green bonds
finance a range of projects across ourthemes. The EIB is the largest issuer
in the theme and the largest issuer oflabelled green bonds to date with over
$15bn currently outstanding.
12 Bonds and Climate Change, July 2016

58 climate-aligned bonds
27 issuers
Largest issuer: Covanta
Labelled green bonds($0.5bn outstanding)
There are two labelled green bonds inthis theme: French waste managementcompany Paprec issued a $500m
green bond in 2015 to finance its
recycling plants while US municipality
Ramsey County issued a $17m bondfor WTE facilities.

More than a third of the use ofproceeds in this theme are linked
to WTE projects, while anotherthird are linked to recycling
Recycled products
24%
Pollution
control
7%

Waste to Energy
36%

Metal
recycling18%
Mixed
recycling
12%

Other recycling 3%

390 labelled climate-aligned bonds
60 issuers
Largest issuer: EIB

The multi-sector theme also includes
bonds issued by corporations andmunicipalities with mixed use of proceeds.
This includes bonds issued by banks
to finance a range of renewable energy
and energy efficiency projects as well as
bonds issued by cities and municipalities
to finance transport and energy
infrastructure.
Exact allocation of proceeds is hardto estimate as data is not available.
However, over 90% (by number) of all
bonds issued have either renewableenergy, energy efficiency or bothdefined as eligible projects while 60%of bonds have defined Agriculture& Forestry projects as eligible. The
proportion actually allocated to smaller
themes such as Agriculture & Forestry
remains uncertain. For example, WorldBank green bonds have agriculture
and forestry projects defined as
eligible but reporting shows relatively
few agriculture and forestry projects
compared to others.
Note: No bonds in this theme have been
included in other themes; no double
counting has taken place.
www.climatebonds.net

UUR

E AND F

O
R

LT

T RY

AGR

IC

ES

Agriculture &Forestry$6.2bn outstanding
Deforestation andagriculture are one of thelargest contributors togreenhouse gas emissions.
Stopping deforestation must
be a key part of a global
emissions reduction plan.
This is currently a small theme, making up
less than 1% of the total climate-aligned
universe but investment in sustainable
land use, forestry and agriculture is criticalto remaining within a 2-degree scenario.
It is unclear at the moment what rolebonds will play in this sector - bonds are
not commonly issued by companies within
the agriculture and forestry sector (out of
all companies in the agriculture, forestry
and farming sectors – fewer than 10%
have issued bonds). Of the bonds in ourdataset, the vast majority are from paper
and pulp companies with FSC-certified
forests and chain of custody certification.

141 climate-aligned bonds
17 issuers
Largest issuer: WestRock

Forest Bonds – future
or fantasy?
Forest bonds have long been discussed
as a potential financing instrument but
we have yet to see serious issuance.
A core issue is that bonds are usually
issued to finance infrastructure thatwill generate revenue. However in theforestry space, discussions relate to theuse of bonds to avoid deforestation,
where revenue streams are not obvious.
The Commission on Climate and Tropical
Forests estimates that $30bn p.a6. isrequired to halve deforestation. The
challenge remains getting solid cash
flows in place to support a bond.
Several new issuers were added to thetheme this year, including American
paper company WestRock for its fully FSC
certified paper products. WestRock was
the largest issuer in the theme, followedby the Swedish state-owned forestry
company Sveaskog.

Climate Bonds Standard
The Land Use Technical Working
Group was convened by the Climate
Bonds Initiative in 2014.
It brings together international
experts in the agriculture and forestry
space to develop robust criteria
for sustainably-managed forests,
agriculture and other lands.
Phase 1 of the Land Use Criteria
has been released for public
consultation and is now in the final
stages of review prior to submission to
the Climate Bonds Standard Board forapproval. These Criteria focus on the
mitigation opportunities of land use
assets and projects.
Phase 2 Criteria are currently underdevelopment. These will focus on
climate adaptation and resilience
impacts of those assets and projects.
6. http://www.climateforestscommission.org/

Future Themes

A

POL

LUTI

ON

MarineNT

WA ST E

D

CO

N

ROL

The Marine Criteria
straddle several
sectors, including
energy (e.g. tidal andwave), transport (marine shipping andtransportation) and fisheries (sustainablefisheries). It also covers marine infrastructuresuch as coastal management against
flooding and erosion. Criteria are likely to be
developed and finalised by the end of 2016.
13 Bonds and Climate Change, July 2016

For this report, we searched for bonds
linked to marine technology such as tidal
and wave but were unable to discoverany. We expect that this will change astechnologies mature and our discovery
tools are refined.

Information,
Communications& Technology
Though ICT may
not seem like agreen industry, it has the potential toreduce our GHG emissions significantly.
Greater connectivity can negate thenecessity for international travel. Also,
improved technological processes canfacilitate greater efficiency through power
management and improved resource andprocess efficiency.
S
TRAN PORT

We are constantly improving ourdiscovery tools for this report. Throughthe Climate Bonds Standard, we intend to
expand our Criteria to cover new sectors
in the climate-economy. This will ensure
we keep up with latest developments
in technology and the bond market. As
such, there are a number of areas which
we hope to be able to include in futurereports. These include:

Though no corporate bonds were foundin this sector, a small number of ICT

bonds were found when carrying out
our research in the US municipal bondmarket. The bonds had a total valueof $26m and were used to lay fibre
optic cables and improve broadband
connectivity. Due to lack of standards
they were not included in the main
data but are a sign of a growing potentialof development in this market andthe importance of developing standards
in this area.

Industrial
EnergyEfficiency
Climate Bonds
Criteria are currently
being developed for Industrial Energy
Efficiency and will attempt to build criteria
for industrial energy efficiency in highly
energy intensive industries, such as steel
manufacturing and building.
www.climatebonds.net

A Diverse Geographic Spread
Norway = $4.9bn

Sweden = $6.1bn

Iceland = $1bn
UK = $61.8bn
Ireland = $7.8bn

Canada = $27bn

Denmark = $1.4bn
Netherlands = $10.4bn
Germany = $14.3bn

France = $63.9bn

Italy = $5bn

USA= $111.3bn

Mexico = $1.2bn

Switzerland = $4.4bn

Portugal = $6.7bn
Spain = $1.3bn
Cayman Islands = $5.2bn

Africa & Middle East = $2.8bn

Brazil = $2.4bn

South Africa = $1.4bn

North America (excluding Mexico)= $138bn

Latin America = $4.4bn

The USA is the second largest issuer country in our climatealigned universe, making up 16% the total. Rail issuer
Burlington North Santa Fe is the largest issuer from the USA,making up 17% of USA issuance alone. While issuers in the
Energy theme tend to be much smaller, they are also more
numerous with over 200 separate Energy issuers making
up a total of $28bn. 40% of the entire Water theme is madeup of US issuers, primarily muni bonds which have beenlabelled as green. USA-based issuers continue to drive thegreen labelled bond market with the USA being the largest
single issuing country to date.

Latin America (including Mexico) remains small inoverall numbers, making up less than 1% of the total.
The majority of bonds fall into the transport andenergy themes with a small proportion of Agriculture& Forestry bonds.

Energy is the dominant theme for Canadian climate-aligned
bonds, primarily due to Hydro-Québec which is the largest
issuer in the Energy theme. Ontario became the first
Canadian province to issue a labelled green bond in 2014.
Note: Only countries with issuance of over $1bn outstanding are represented on the map.
The remaining countries are included within regional totals and amount to $6.1bn in total.
Regional development banks are also included within regional totals where appropriate.

14 Bonds and Climate Change, July 2016

While the numbers are small, there is growing interestin climate finance solutions (including labelled green
bonds) in Latin America. The Climate Bonds Initiativeis involved in setting up Working Groups in Mexico
and Brazil. A focus will be the agriculture and forestry
sectors, where a large proportion of global emissions
come from.
Labelled green bond issuance from Latin American issuers
is small but growing. Recent bonds include a $500m bondfrom Costa Rica’s Banco Nacional in April 2016. Whilethey have primarily been in the Energy theme, we expect
to see future developments in the Agriculture & Forestry as
definitions and criteria become clearer.

www.climatebonds.net

Top 10 countries for climate-aligned bonds

Rest of the World 11%
Germany 2%
Russia 2%
India 2%South Korea 3%
Canada 4%

Russia=$15.5bn

China
36%

Supranationals
6%

China = $246bn(Page 17)
India = $16.9bn

South Korea = $19.6bn
Japan = $2.6bn

UK
9%France9%

United States
16%

Hong Kong = $1.5bn
Thailand = $3.2bn

Eastern Europe = $15.7bn
Russia accounts for largest proportion of climate-aligned
bonds from Eastern Europe. The majority of these were linked
to the Russian Railways who met our criteria of less than 50%
of revenue coming from the transportation of fossil fuels.

Australia = $2.5bn

Remaining Eastern European issuance is small and includes
only one unlabelled climate-aligned issuer from Hungarian
Enefi Energy. There have been two labelled green bonds outof Eastern Europe thus far: Nelja Energia from Estonia (forrenewable energy) and Latvenergo out of Latvia.

Asia Pacific (excluding China) = $48bn
Excluding China, the Asia region is dominated by India andSouth Korea

Western Europe = $195bn
The UK and France are the largest issuing countries inWestern Europe given large rail financing projects
The majority of UK issuance has come from Network Railfor rail finance and refinancing. New rail projects in the UK
include Cross Rail in London.
Issuance from France is dominated by state rail entity SNCF
which accounts for 67% of French climate-aligned bonds.
French regions have also been pioneers in the muni and citybond space, with the first ever green muni/city bonds issued
by French regions in 2012 and the latest from Paris in 2015.
While Transport is the largest theme in the region, Germany
bucks the trend in Europe with energy bonds accounting for
84% of all German climate-aligned bonds. German issuancemakes up 10% of the Energy theme overall, due to large
issuers (such as KfW), linked to wind and solar.
Western Europe is the largest region for labelled green
bond issuance accounting for over 40%.

15 Bonds and Climate Change, July 2016

South Korea has almost equal issuance in energy andtransport themes with two dominant issuers: Korea Railroad
and Korea Hydro & Nuclear. In the labelled green bonds
space, Hyundai issued Korea’s first corporate green bondlinked to energy efficient and electric vehicles in 2016.
India’s significant presence in the market is due to large
issuers: Indian Railways and National Hydroelectric. Both are
currently in our unlabelled climate-aligned universe and until
2015, this was India’s only presence in our report. However,changes in Indian policy have led to issuances of labelledgreen bonds from Hero Wind Energy (2015), Axis Bank
(2016), Yes Bank (2016) and others. We expect to see many
more in the future.
Australian issuance of unlabelled climate-aligned bonds
is small and dominated by rail operator Aurizon. However,Australia has proven to be an active region for labelledbonds certified by the Climate Bonds Initiative with bonds
from banks: ANZ Bank (2015), National Australia Bank
(2014) and Westpac (2016).
We did not find any unlabelled climate-aligned issuancefrom the Philippines, but note that the first labelled green
bond from the Philippines was issued by AP Renewables in2016. It finances geothermal and hydro power projects.

www.climatebonds.net

Spotlight on Brazil: A Key Player in Global
Climate Action
Brazil has an abundanceof natural resources aswell as a growing renewableenergy industry.
It is also a key player in global climate change
negotiations and with substantial low-carbon
investment opportunities, Brazil has shownleadership within Latin America in terms of
its COP21 commitments7. Green bonds could
help in shifting a significant amount of capital
towards the investments required to meetthese achievements.
Three sectors will be critical to both Brazil’s
economic growth and its transition to a lowcarbon and climate-resilient economy.

1. Agribusiness
As the country with the world’s largest areaof arable land8, Brazil has the opportunity
to strengthen its leadership in the global
agricultural market and to meet the challengesof rising global consumption, while providing
affordable food for its own population.
To grow the agribusiness sector in a waythat does not come at the cost of increased
emissions will require the country to decrease
the carbon footprint of agriculture and land
use change9, while continuing to learn from its
history of widespread deforestation10.

According to the Brazilian INDC11, theagriculture sector is committed to enhancing
the Low Carbon Emission Agriculture Program(ABC), via restoring 15m hectares of degradedpasturelands and improving 5m hectares ofintegrated cropland-livestock-forestry systems(ICLFS) by 2030.

2. Forestry and paper
Brazil is one of the world’s major exporters of
pulp and paper products and it is gradually
expanding its wood pulp production; partly due
to growing demand from Chinese producersof tissue, specialty paper and cardboard12. This
sector also has an important role in fostering
carbon storage, helping the country to achieve
its INDC targets.
According to the International Council ofForest and Paper Associations (ICFPA), thecontribution of the forestry and land use sector
represents 20% to 25% of mitigation expected
in global INDCs. There is also a large industry
effort to ensure the recovery of devastatedareas through plantation forests in Brazil. An
example is the recovery of the Atlantic Forest:
40,000 hectares recovered in 2015 with an
aim to reach a total of 15m hectares by 205013.
This industry is also well placed to address
climate change as Sustainable Management
certifications (such as FSC) become moreprevalent – along with the increase of recycledcontent in manufactured paper products.
The combination of a low-value currency andstrong demand can also stimulate more green
bonds issuances in this sector.

1stexporter ofsugar andsoybeans

2ndlargest forested
area by country

3rdlargest exporterof corn

3. Renewable energy
Last year, $7.7bn was invested in new renewableenergy assets in Brazil14 and investment inrenewable energy (excluding large hydro) is
expected to increase. Competition in the solar
PV industry is rising - 2.2GW was contracted
via auctions, where the average price was BRL
297.37 per MWh ($77.24/MWh)15.
Brazil is also major player in global windmarkets with almost 9GW of installed capacity(number 10 for installed capacity in theworld16), and attracting approximately $2.4bn
annually for new build. Within this context,
Brazil’s INDC is committed to increasing theshare of wind, biomass and solar to at least
23% of the national power supply as well as
to increase energy efficiency in the electricity
sector by 10% by 203017.
According to the World Bank, almost one-fifthof the energy efficiency goal can be achieved by
implementing new street lighting technologies,
such as LED, throughout Brazil. Further clarity
around definitions and criteria for eco-efficient
products, production and processes through theinternational Climate Bonds Standards and theGreen Bond Principles could encourage more
green bond issuance in this area.
7. Climate debate, The Economist, 2015
8. More than 400 million hectares: FAO
9. Worldwide agriculture and land use changes makeup 24% of global emissions: http://newclimateeconomy.report/2014/land-use/
10. Figures indicate a Brazilian tree cover loss of 38
million hectares between 2001-2014: http://www.
globalforestwatch.org/country/BRA
11. INDC: Intended Nationally Determined Contribution
12. FAO, 2014 and Bloomberg, 2016
13. Iba, 2016
14. Frankfurt School-UNEP Centre/BNEF 2016
15. Ibid.
16. http://www.gwec.net/wp-content/uploads/2012/06/Global-Installed-Wind-Power-Capacity-MW-%E2%80%93-Regional-Distribution.jpg
17. Brazilian INDC

4thlargest producer
country of fibre
furnish16 Bonds and Climate Change, July 2016

5th

largest country
by areawww.climatebonds.net

The Brazilian Climate-Aligned Bond Market
We identified $2.4bn ofclimate-aligned bonds
outstanding (as of 31 May
2016), of which 23%
are comprised of labelledgreen bonds. The latter
were issued by entities
such as BRF and more
recently by Suzano.

More than 50% of outstanding climate-aligned bonds are dedicatedto transport solutions, with rail freight being the largest climate
technology in this sector
Wind
Mixed Renewable Energy

Energy23%

Brazilian climate-aligned bonds in the transport
sector are all linked to rail, including public
transit solutions such as urban rail and metro,rail freight and related construction activities.
Issuers include MRS Logística, América
Latina Logística Malha Norte, SuperVia
Concessionária de Transporte Ferroviário andConcessão Metroviária do Rio de Janeiro.
Brazil’s Logistics Investment Plan18 (PIL)
indicates new rail concessions will need
BRL 86.4bn in capex alone, a considerable
opportunity for green bond issuance.
23% of outstanding climate-aligned bonds
are issued by companies in the energy sector,
including wind (for example the São Miguel do
Gostoso wind farm), small-scale hydro, solar,
biomass and mixed renewables (such as bonds
from the issuer CPFL Renováveis).
The multi-sector segment is comprised of one
bond - the only labelled green bond issued
in Brazil (before May 2016) by BRF, which is
predominantly active in the food industry. The
Sao Paulo-based company issued a EUR500m($549m) BBB-rated bond in May 2015, witha coupon of 2.75%. More than 50% of buyers
were from Europe, with most of them based inGermany, France and Switzerland. The bondwill fund projects aimed at reducing waterand electricity consumption, while decreasing
carbon emissions and waste production19.
In the Brazilian climate-aligned bond universe,
82% of the bonds issued are between
USD100m and USD1bn indicating a broad
spectrum of investment opportunities.
The Transport sector has the most variedbond sizes ranging from USD10m to USD1bn.
The largest bonds in the universe (USD500m– USD1bn) fall into the Multi-sector andthe Transport themes while the Ag&Forestry
and Energy sectors have the smallest
issuance bond sizes.
The climate-aligned universe provides arange of short to long term opportunities toinvestors. Tenors of between 5 and 10 years
are the most common with 68% of theBrazilian climate-aligned bonds in this range.
28% range from 3 to 5 years whilst 4% havea maturity of less than 3 years.

17 Bonds and Climate Change, July 2016

Transport
54%

Multi-sector
23%

Rail Freight

Mixed

Urban Rail
Public Transit

The average size of more thanhalf of the climate-aligned
bonds issued is between
USD100m and USD500m

500m–1bn
24%

10m–100m
18%

Following the cut-off date for inclusion on thisreport, Suzano Papel e Celulose (one of thebiggest pulp and paper producers in Brazil),issued its debut green bond for $500m. It
received a BB+ rating and has a coupon of
5.75%20. We note that earlier Suzano bonds
were already included in our climate-aligned
universe due to the fact that all of its forests
have received FSC or PEFC certification.
Future Brazilian issuance is likely to comefrom issuers with a good local and global
credit rating score. The majority of issuers thatmeet these characteristics are in agricultural,
forestry and energy industries, as well as
commercial and development banks, who canissue green bonds to refinance their portfolios.

100m–500m
58%

18. Brazil’s Ministry of Plannning programme available
at http://www.logisticabrasil.gov.br/ferrovias2
19. Bloomberg, and Latin Finance 2016
20. Ibid.

www.climatebonds.net

Brazil’s Strengths
There are 59 million metrictons of carbon stocks in
Brazilian forests21

Brazil has 71% of Latin
America’s total wind installedcapacity22

Brazilian South and Southeast
regions accounted for 81% of
the national timber production
in 201324

There were approximately
6.3 million hectares of FSC
certified forests in Brazil in
201525

Brazil’s rail network amounts
to approximately 28,500 km,
which is 3,000 km more thanthe Earth’s diameter23
254 MW will be the total
installed capacity of Ituverava
solar farm, Latin America’s
second biggest power plant,
set to be operational in Brazil
in late 201726

Rio Grande do Norte 1163 Wind turbines

Ceará 748 Wind turbines

Mato Grosso
29% of national soya bean production

Goiás
9% of national soya bean production

Bahia 764 Wind turbines

Brasília

São Paulo
Top biomass power producer state

Mato Grosso do Sul
15% of national soya bean production

Rio de JaneiroSão Paulo
Paraná
18% of national soya bean production
Rio Grande do Sul 668 Wind turbines

Rio Grande do Sul
15% of national soya bean production

18 Bonds and Climate Change, July 201621. http://www.globalforestwatch.org/country/BRA
22. http://www.thewindpower.net/
23. http://www.brazil.org.za/brazil-rail-trains.html
24. http://www.agricultura.gov.br/arq_editor/
PROJECTIONS_ENG_WEB.pdf
25. https://ic.fsc.org/preview.2015-fsc-market-infopack.a-5067.pdf
26. https://servizi.enel.it/eWCM/salastampa/
comunicati_eng/1666068-1_PDF-1.pdf

www.climatebonds.net

Challenges, Opportunities and Next Steps
Challenges:
The Brazilian bond market is immatureand dominated by sovereign issuance
The government bond market in Brazil
is much larger than bonds issued byprivate-sector entities, as the charts to
the right illustrate. While corporate bondissuance has risen in the last 10 years, themarket remains concentrated between
a few issuers. This is a barrier to green
bond issuance as a small corporate bondmarket also means that liquidity can be
low for new issuers. This could be further
constrained within the green bonds market
where liquidity has historically been lower
than for vanilla bonds.
Political and economic backdrop
Brazil is currently experiencing challenging
economic and political circumstances that
could discourage international investors
from buying Brazilian green bonds. Better
economic stability would facilitate a shift ininvestment planning from shorter to longer
term horizons and encourage bond issuance.
Selective Tax Breaks
Credit Bonds are regulated securitised
credit. They include mostly agriculturaland real estate credit, through instruments
called CRA and CRI respectively, and theircounterparts for financial institutions, LCA
and LCI.
Brazilian retail and foreign investors don’t
pay income tax when buying these bonds,
therefore issuers price them below market
rates to capture part of the investorsavings. The same tax break applies toinfrastructure bonds. This has resulted ina rush by issuers to tailor their financing
requirements to take advantage of theseopportunities. The consequence is that
Brazilian institutional investors are leftout with little corporate credit to buy atmarket rates.

Policy and Regulatory
Environment
Overcoming the current challenges andfostering further capital market development
will require efforts across a broad policy
landscape.
1. Capital market regulators, such as Anbima
and CVM, have a fundamental role in enhancing
the Brazilian capital market. This includes
improving liquidity, promoting debt issuance,
reducing tax asymmetries for different asset
classes and terms, as well as supporting
financial education and investor programmes.
2. Pension fund regulators could also consider
more flexible limits for ESG-related investments
such as green bonds, thus influencing strategic
asset allocation.

19 Bonds and Climate Change, July 2016

Brazilian private bond market: Fixed income market
distribution
Other BRL 37 bn

Financial Bills
BRL 435 bn
CDB
BRL 533 bn

Credit Bonds
BRL 621 bn

FederalPublic Bonds
BRL 2,666 bn

Private Fixed income
Market distribution(BRL bn) - Mar/16

Corporate Bonds(Debentures)
BRL 777 bn

Role of Development Banks
3. Development Banks can also stimulate thismarket by providing incentives for issuers. For
example, BNDES (the Brazilian Development
Bank) is currently requiring clients borrowing
at subsidized rates (Long Term Interest Rate
– TJLP) to use bond markets to complete theirfinancing needs.
4. Credit enhancements can significantly
improve ratings and attract conservative
investors.. For example, the Inter-American
Development Bank enhanced Mexico’s
Development Bank, Nacional Financiera’s(Nafin) $500m Certified Climate Bond in 2015.
5. Local Development Banks themselves canrefinance their portfolios or issue green bonds
as an alternative to raising funds internationallywith multilateral institutions.

Other Opportunities
Refinancing green assets: Brazilian commercial
banks had BRL 153bn in outstanding loans to
low-carbon economy sectors in 201427, 9.6%of the total outstanding loans. These loans canbe packed and sold as green bonds throughinstruments such as LCIs, LCAs and Notes,
freeing up capital to new investments.
Financing public lighting and muni bonds:
Cities are among the biggest consumers ofenergy in the world, accountable for more than
70% of greenhouse gas emissions. Green bonds
can help to shift finance towards investments inenergy efficiency for public lighting by financing
LED street lighting technology. According to a
World Bank study for Brazil, based on analyses
undertaken by Pezco Consultoria, LEDs would
allow Brazil to save as much as 2% of its
current electricity consumption. Brazil has alsotransferred responsibility for street lighting

Others BRL 8 bn

Credit Bonds
BRL 621 bn
Banking
BRL 989 bn

Corporate
BRL 785 bn

assets to municipalities. These rely on a stableflow of funds that are strictly earmarked,
leading to a resurgence of projects all over thecountry.
Building a foundation to scale up the market:
Brazil has the capacity to become a key global
participant and leader in the transition toa low-carbon, climate-resilient economy.
The development of a robust and transparent
ecosystem is vital to enabling the Brazilian green
bond market to scale up. Since 2014, the Climate
Bonds Initiative, in collaboration with its local
partner SITAWI, has been working closely withthe public and private sectors to help drive thisagenda forward in Brazil. Leading institutions
such as CEBDS28, FEBRABAN29, FGV30, and PRI31,
in coordination with Brazil’s key industry players
as well as banks, are contributing to these
efforts. They are actively engaged in projects
to provide guidance, expertise and educational
activities for market participants.

27. Febraban and GVces: https://www.febraban.org.br/
Noticias1.asp?id_texto=2716
28. CEBDS (Brazilian Business Council for Sustainable
Development)
29. Febraban ( Brazilian Federation of Banks)
30. FGV (Fundação Getúlio Vargas)
31. PRI (Principle for Responsible Investment).

www.climatebonds.net

Spotlight on: The US Municipal Bond Market
The US municipal (muni)
New York, California and Massachusetts are the top 3
climate-aligned bonds issuersbond market is repletewith climate-aligned
WA
investment opportunities.
We identified $30bn
NYof climate-aligned US
muni bonds, 68% of which
IL IN
are unlabelled.
CO

MA
CT

CA

The first labelled green bonds issued bya municipality/city were issued by French
regions Île-de-France, Nord-Pas-de-Calais
and Provence-Alpes-Côte d’Azur in 2012.
Since then, muni and city bonds fromaround the world have joined the market
and total issuance makes up a significant
proportion of the labelled green bond market.
Non-US municipalities/cities/regions
have issued over $6bn in labelled green
bonds since 2012, with multiple issuancesfrom Île-de-France, City of Gothenburg,
Stockholm Lans Landsting and others.
The entry of the first US Municipal
bonds into the labelled market was a
game-changer because of the scale ofthis market and its potential for futureissuance. Investors currently hold $3.7tn
of US municipal debt while issuance in2015 was over $400bn32.
The search tools and reporting availability
for the US muni market made it possible tocarry out an in-depth analysis of thousandsof individual US muni bond prospectuses
from 2014-2016 to find bonds that meet
our climate-aligned criteria.
This enabled us to discover a further $20.6bn
of unlabelled climate-aligned bonds
which, with the $9.7bn labelled green
bonds, brought our total climate-aligned
US muni bond universe to $30.3bn.

Green City bonds
Green bonds can offer much needed
access to capital for local governments
and cities in emerging and developing
countries to finance climate-friendly
infrastructure. However, local
governments, as well as local utilities
and transport companies often lackthe know-how or legislative power toaccess the bond market.
The Climate Bonds Initiative has
partnered with others to provide
guidelines on issuing muni bonds.

20 Bonds and Climate Change, July 2016

VA
AZ
GA
TX

>$1bn
$500m-$1bn$100m - $500m<$100mNo data

Bonds are primarily financing
transport and water projects

Multi-sector
5%
Energy
9%

Water
23%

Buildings & Industry
4%
Waste & Pollution
2%

Transport
57%

Use of proceeds
Bonds were used to finance a diverse range of
projects including; urban rail, renewable energy,
energy efficiency projects, sewage treatment,
recycling and flood defences. However, as in
the wider climate-aligned universe, transport
dominates issuance with the majority of debt
being issued by transit authorities.
The US muni bond market has had a long
history of issuing climate-aligned bonds.
For a decade, US municipalities have beenraising finance for energy conservation
and renewable energy through Qualified
Energy Conservation Bonds (QECBs) and
Clean Renewable Energy Bonds (CREBs).

Labelled green bonds
2015 saw significant growth in thelabelled green muni bond market,
with $4.7bn in issuance, up by 47%
over 2014.
Largest issuers in 2015: Washington
state (>$1bn), Massachusetts($915m), New York ($479m).
Water infrastructure accounted for 46%
of issuance. Transport made up 25%.
The first Climate Bonds certified
muni bond was issued in Feb 2016
by the Metropolitan Transportation
Authority of New York.
An interesting feature of the Americanmunicipal bond market is the highnumber of retail investors; up to 50%
of US municipal bonds are bought
by individuals. A key reason for the
popularity of the muni bond market in the
US is that bonds are frequently structured
to give tax breaks to bond buyers. This
enables bonds like CREBs and QECBs
to appeal to both retail investors andinstitutions that are looking for low-riskand tax efficient investments, which inexchange gives municipalities access to
low-cost capital for clean energy projects.
32. https://www.sec.gov/spotlight/municipal
securities.shtml

www.climatebonds.net

Spotlight on: China

Labelled green bonds in China
China is seen as a leader in driving
growth in the labelled green bondmarket. Shanghai Pudong Development
Bank, Industrial Bank Co. and Bank of
Qingdao have issued labelled green bonds
totalling $7.5bn in 2016, making China thelargest country of issuance in 2016 so far.
The total labelled issuance figure above
is based on PBoC’s recently developed
green bond guidelines. These aim toencourage issuers to arrange external
reviews on the green credentials of bonds
and to incentivise institutions and service
providers to develop issuing capabilities.
PBoC is also the regulator overseeing theinterbank bond market, accounting for
93% of outstanding bonds in China.
The implementation of third party
certification against green bond standards
is emerging. Approved verifiers under
the international Climate Bonds Standard
and Certification Scheme, such as
KPMG, EY, DNV GL, Bureau Veritas andTrucost, can provide certification services
in China against the Climate Bonds
Standard, as well as checking adherence
to PBoC’s Guidelines.
21 Bonds and Climate Change, July 2016

76% of overlapped bonds are in thetransport theme.

3 bn
4
3
= $ Our China totOverlap =$220bn$246bnOur collaboration with entities such as
the CCDC, CECEP, NAFMII and Shanghai
Stock Exchange has helped to identify
more unlabelled domestic bonds (seediagram to the right)36.

Overlapped bonds make up 90% of
outstanding Chinese bonds in ourdataset and 65% of the China Green
Bond Index.

The primary reason that the China
Green Bond Index includes bonds which
we excluded is due to differences ininclusion criteria, specifically based on
China’s context. For example, we requireat least 95% of the companies’ revenue
to be climate-aligned. The China Green
Bond Index’s criteria also allow fossilfuel related investment such as clean
coal while we do not.

al=China is the largest country of issuancein the climate-aligned universe where
unlabelled issuance is dominated by
China Railway Corporation (largest issuer
with $194bn). These figures highlight theimportance of bonds within the transport
sector and demonstrate the continuing
importance that bonds will play in raisingfinance for low-carbon transportation.

The China Green Bond Index, put
together by CCDC and CECEP, amounts
to approximately RMB 2.3tn ($343bn).
We analysed this index against our
China bond dataset and discovered that:n B on d I n d
e
e
r
ex
G
a

An annual investment of at least RMB24tn ($320-640bn) will be required toaddress climate change33 in China, of which
85-90% is expected to come from theprivate sector34. The Chinese government
has announced it will issue RMB300bn($46bn) of labelled green bonds in 201635.

This year marks the release of the ChinaBond China Green
Bond Index which is a list of climate-themed bonds in China.

Ch
in

The Chinese governmentis ready to expand
private investments for
its transition to a low
carbon economy.

PBoC publishes
official green bondguidelines
2015
July

2016
December

Xinjiang Goldwind
Science andTechnology issues
China’s first
corporate Green
Bond

January

Green financial
system formallyendorsed in the
13th Five Year Plan

China is the largest
country of issuancein 2016ytd

March

June

Joining the EY Chinese
branch, SynTao Green
Finance becomes the
1st Chinese-registeredcompany to be approved
as a verifier against theinternational Climate
Bonds Standard

33. http://finance.china.com.cn/money/bank/yhyw/20160317/3631992.shtml
34. People’s Bank of China/United Nations Environment Programme.
35. China Daily: http://europe.chinadaily.com.cn/
business/2016-03/04/content_23746490.htm

April

CCDC and CECEP launch
the China Green Bond Index
and the China Green Bond
Selected Index
Shanghai and Shenzhen Stock
Exchanges set up guidelines
for their corporate Green Bondissuance pilot programmes

36 National Association of Financial Market Institutional
Investors (NAFMII): http://www.nafmii.org.cn/english/
China Central Depository & Clearing Co (CCDC):
http://www.chinabond.cn/d2s/eindex.html
China Energy Conservation and Environmental Protection Group (CECEP): http://www.cecep.cn/g3603.aspx

www.climatebonds.net

A Solid Foundation for Growth
The continuing strengthof the labelled green bondmarket illustrates theextent of investor demandfor climate-related
investments.
The case for investors is simple: green
bonds have comparable yield and ratingsto other available investments, withthe added benefit of proceeds going toassets or projects material to addressing
climate change. Simple, yet powerful, withover-subscription being the norm in bothdeveloped and emerging markets. That’s
because investors with tens of trillions ofdollars under management have indicatedtheir anxiety about climate change risks.
The climate-aligned universe outlined inthis report shows just how many unlabelledbonds are available to investors looking toshift capital to climate-aligned investments.
It also demonstrates the opportunity for
growth in the green bond market if futureissuance from these issuers is labelled.

Combined with continuing growth incorporate green bonds, we believe thelabelled green bond market can reach$300bn p.a. of issuance by 2018.
Some $2.5-3tn of capital is needed
each year in climate change related
investments, with 60-70% of that goingto emerging markets. An indicator of
adequate bond market engagement would
be climate-related issuance of at least $1tn
a year. That’s the objective for 2020.
To achieve this objective we need:
1. To develop local green bond markets
Insurance investors and pension funds
have been the main drivers of the labelledgreen bonds market; playing an importantrole as international investors, they will
stimulate green bond issuances in different
countries. But domestic capital will need tobe mobilised as well. That will take:
Demonstration issuance of domestic
green bonds by public sector entities
and banks. The aim is to make domestic
investor demand visible, while providing
guidelines for issuance by others andliquidity for a nascent market. We

Key Takeaways
COP21 commitments meanthat vast green infrastructure
investments are needed.
	The capital needed is available andit needs infrastructure style yield.
	Institutional investors say theywant green; the green bond market
is evidence of that demand.
	Governments now need to act tobring green infrastructure projects
to market.
expect this next in countries such as
Brazil, Mexico and South Korea.
Convening national market development
collaborations that include local
institutional investors. For example, theMexican Stock Exchange is hosting a
Climate Bonds Working Group.
Regulatory reform to encourage capital
flows to climate-aligned investments.
This will include: a) investibility reforms,
like land use zoning that allows highdensity developments over metro

In our 2015 State of the Market report, we proposed an agenda for policy makers. We’re making progress:
1. Establish green projectpipeline

In the wake of COP21, various projects are now pushing pipeline development. For example,
a Green Infrastructure Investor Coalition, led by Climate Bonds, was launched this year. Its
aim is to bring together investors, governments, development banks and project developers topromote capital flows to developed green project pipelines.

2. Strengthen local bondmarkets

In the wake of publishing green bond regulations, China opened up access to its interbank bondmarket for foreign investors in February 2016.

3. Strategic public issuanceState-owned development banks in Mexico and Costa Rica issued their country’s first green
bonds. Separately, IFC issued the first green masala bond (Indian Rupee denominated in an
overseas market) in August 2015.

4. Develop green standards

Official green bonds guidelines published by the People’s Bank of China and the National
Development & Reform Commission (NDRC).
Green bonds requirements published by the Securities and Exchange Board of India (SEBI).

5. Strategic public
investment

In May 2016 IFC was the sole investor of a private placement deal to finance YES Bank’s second
green bond issuance. In October 2015 the Central Bank of Bangladesh committed to investing ashare of foreign exchange reserves in green bonds.

6. Credit enhancement

In May 2016 Zhejiang Geely issued a green bond with an enhanced rating (A1/A/A), provided
by a standby letter of credit from the Bank of China London Branch.

7. Tax incentives

In China, tax incentives for green labelled bonds were proposed by the PBoC in March 2015.
In Dec 2015, SEBI proposed tax incentives for bonds of INR 50bn for renewable energy
projects in India.

8. Instruments to aggregate
assets and structure risks

In May 2015 the Inter-American Development Bank launched a project financing ademonstration green securitization deal, aggregating energy efficiency loans in Mexico.
The Climate Aggregation Platform, launched at COP21 by UNDP & Climate Bonds, to promote
the dissemination of best practice in green aggregation and securitisation.

22 Bonds and Climate Change, July 2016www.climatebonds.net

stations in return for property value
increases being used to pay for themetro line; b) capital market reforms likeremoving restrictions that limit green
bond investments. China’s opening up of
the domestic bond market for overseas
investors earlier this year is an example
of a policy change that will benefit green
bonds investment.

For more on Green Infrastructure Investing see ww.giicoalition.org

2. Ambition adequate to the challenge
While the scale of the challenge is large, theinvestment opportunity is also immense.
Governments at national and sub-national
levels need to turn their now ubiquitousclimate change plans into green investment
plans that can be used to drive
financing strategies.
Some countries are actingwith ambition: India has set atarget of 175 gigawatts of new
renewable energy capacity by
202237, and has similarly massive plans forrail development, water infrastructure andsmart cities. According to Yes Bank, $70bn
of debt investment is needed to achieve thecountry’s clean energy goals alone. China’s
ambition is even greater: the Central Bank
believes the country will need $300bn a
year for its green transition, with only 15%
available from public sources. Governmentsin Germany, France and Mexico also haveambition; others will follow this year.
37. Bloomberg: http://www.bloomberg.com/news/
articles/2015-02-28/india-to-quadruple-renewable-capacity-to-175-gigawatts-by-2022

3. An opportunity for governments to act
There are trillions of dollars of investible
projects around the world that must be
developed in order to reduce emissions
quickly and help economies adapt toclimate change already underway. These
are in areas like clean energy, low-carbon
transport and climate-resilient water
infrastructure.
At the same time, we have a world awash
with capital, with much of it invested
in historically low-yielding assets like
German government bonds - assets thatwill not fund pension and insurance fundliabilities. These funds need investment
opportunities with some yield.
Strong demand for green bonds
shows there is clear investor
appetite for green deal flow.
For a hundred years, governments
have been using regulation,
guarantees and long-term contracts
to design projects that attract
institutional capital.
Action to bring green infrastructure
projects to market will deliver deal flow for
pension and insurance funds, and deliver itwith the risk/yield profiles investors need.
But we need urgent action. That means
everything from creating clever publicprivate partnerships to reforming
regulation to support green investing.
If we do that, we will see the needed $1tn
of green bonds issued annually.

Is a price difference important? The implications of a “greenium”
Anecdotal evidence has emerged that, insome markets at least, green bonds arereceiving better pricing than plain vanillabonds. Is this a sign that some investors
are willing to pay a ‘greenium’ for green?
A look at labelled green bonds in EUR
and USD shows that quasi-government
green bonds are priced roughly in line withvanilla bonds. However, for certain EUR
denominated corporate green bonds, we
see a premium in the secondary market,
and primary market spreads are tighter.
There would seem to be a lack of supply
relative to demand. That suggests ongoingappetite for more labelled green bonds,
and investors paying a small ‘greenium’.

A greenium implies lower returns
for investors, but cheaper funding for
issuers. A lower cost of capital would
be a game-changer for issuers, but forinvestors means sacrificing returns.
This could result in a green bondmarket limited to funds with a green
bond mandate.
For the green bond market to reach thescale required, it’s crucial green bonds arein mainstream portfolios. Our view is thatpricing will (and should) remain tight, but
within limits acceptable to the majority ofinvestors. Beyond this, green investments
should and will be preferenced using
government policy tools.

How governments can grow green bond markets & green financeCan a ‘brown’ company
issue a green bond?
Yes. This is why:
1. Green bonds are about use ofproceeds. This is a pillar of the Green
Bond Principles.
2. Urgency requires big players: We
don’t have the time to leave all green
investments to smaller, pureplay
green companies, and wait for them toslowly displace fossil fuels.
3. Fossil fuel companies offer scale:
Their green units account for a small
share of company balance sheets, but
are large compared to other players.
E.g. if the solar division of Total SA
was separate, it would be one of theworld’s largest solar businesses.
4. Using ‘brown’ balance sheets tobuild green infrastructure is what weneed. If green bonds are backed by
the full balance sheets of a fossil fuelcompany, investors don’t need to takeon renewable energy risk.
5. It’s already happening: Engie, alargely gas energy company, issued agreen bond. The balance sheet does
not impact the green credentials of thebond provided strong management
practices are in place.
6. Banks and energy giants issue green
bonds despite fossil fuel filled balance
sheets. Oil companies issuing green
bonds is no different to issuance frombanks with fossil fuel exposure.

Where is the ‘additionality’?
To date, green bonds have been largely
used for projects already planned orfor refinancing completed projects.
Do they really contribute to addressing
climate change?
To answer that an understanding of
the capital flow is needed: bonds areprimarily refinancing instruments thatallow equity investors and banks tofree up capital from existing assets andrecycle it into new projects. Or allow
corporates to develop assets internallyand, when the new asset is valued on
their balance sheet, issue new bonds
backed by that increased balance sheet.
And then move on to the next cropof projects. A large and liquid bondmarket makes all that possible.

Fundamental Actions

Proven Support Tools

Innovative Additions

Establish green project pipeline

Instruments to aggregate assets andstructure risks

Adjust risk weightings for green
investments

Strategic public green
bond investment

Preference green
investments in central
bank operations

Strengthen local bond markets
Strategic public green
bond issuance
Develop green
standards

GO

23 Bonds and Climate Change, July 2016

Credit enhancement
Tax incentives

www.climatebonds.net

Bonds and Climate Change
We need a huge capital shift to
avoid catastrophic climate change
Required: $93tn global investment inclimate solutions by 203038
This will include substantial bond issuance
Investors can act now: in a $90tn bond market wefind $694bn of climate-aligned bonds outstanding

n
t
0

b
o
l
g

o
b
l
a

rke
a
m
nd

t

Th
e

The $118bn
labelled green
bond market$9This is largely an investment grade universe

The $694bn
climate-aligned
bond universe© Published by the Climate Bonds Initiative
July 2016 in association with HSBC Climate Change
Centre of Excellence.
The Climate Bonds Initiative is an investor focused not-forprofit, working to mobilize debt capital markets for a rapidtransition to a low-carbon and climate resilient economy.

www.climatebonds.net

Preparedby Climate Bonds Initiative.
24 Bonds and Climate Change, July 2016

Report prepared by the Climate Bonds Initiative. Written by
Bridget Boulle, Camille Frandon-Martinez, Jimmy Pitt-Watsonwith help from the Climate Bonds team as well as
Ana Monteferrario, Tess Olsen-Rong, Alan Meng andCandace Partridge. We would like to thank MyLinh Ngo andChris Kaminker for their input.
Reviewed by SITAWI Finanças do Bem, by Beatriz Ferrari and
Isabel Rodrigues, supervised by Gustavo Pimentel.

Disclaimer: This report does not constitute investment
advice and the Climate Bonds Initiative is not an investment
adviser. The Climate Bonds Initiative is not advising on the
merits or otherwise of any bond or investment. A decision
to invest in anything is solely yours. The Climate Bonds
Initiative accepts no liability of any kind for investments
anyone makes, nor for investments made by third parties.

All source data from Bloomberg LLP. All figures are rounded.

Commissioned by HSBC.

Reviewedby SITAWI
www.climatebonds.net

Design: Godfrey Design.

38. http://2014.newclimateeconomy.report/finance/