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Green Bonds – a key tool for financial centre competitiveness: Lessons from Europe Financial centres have a vital role in scaling up sustainable Financial Centres for Sustainability (FC4S) Europe action, as the places where demand for and supply of finance FC4S Europe is the regional node of the UN Environment FC4S global network, launched meet. In their different roles, in September 2017. The FC4S Network is a platform for financial centres authorities to financial centres can support the exchange experiences and develop practical collaborations to build robust and liquid green mainstreaming of sustainability and sustainable financial markets. FC4S Europe works to support pan-European green risks and transform and sustainable finance efforts, including the EU Commission Action Plan for Financing opportunities into market Sustainable Growth. practices, across banking, capital markets, investing, , of green bonds highlights the necessity to green market and green bonds have and . involve new market participants and actors, contributed to moving the conversation on such as sustainability experts, civil society green finance into mainstream economic and This briefing gathers the experience of European organisations, and individual consumers.3 financial sector deliberations including the financial centres with green bonds, and provides G20 Green Finance Study Group, the Financial insights on how green bonds can be leveraged Financial Centres & Green Bonds Stability Board’s TCFD process and the as a core pillar of sustainable financial centres. Network for Greening the . Developing a domestic green It has been developed by the Climate Bonds can support financial centres on their Initiative as part of the Financial Centres for journey towards becoming fully sustainable, Financial centre authorities, with their varying Sustainability (FC4S) Europe project, with as it can help to: market development functions, can foster the the support of Climate-KIC. • Raise awareness around green development of green bond markets by:5 investments: green bonds have given proof Introduction • Supporting the development of guidance to financial sector participants – , for green financial instruments: Financial centres are cities with an intense , underwriting and rating Depending on the institutional structure concentration of financial activity and often agencies – that green and sustainable of financial centre authorities, these can where and public debate finance is an area of growth and opportunity. be in the form of regulation, guidelines or on financial performance develops.1 Since • Create a tool to facilitate - requirements COP21 in , several major financial engagement: issuers report that green centres have launched green or sustainable • Developing new market infrastructure: bonds have broadened their investor base finance initiatives reflecting a growing Financial centre authorities can work and deepened their engagement levels with momentum towards sustainable finance, with key platforms to encourage the investors in the fixed income space, as they responding to policy, market and economic development of specific segments, enquire about both the issuance and the needs. indices, or other platforms. Several ’s sustainability plans. exchanges in Europe have created By harnessing the power of place, where • Develop a common understanding of green bond segments, with minimum demand and supply meet, financial centres have what constitutes green investments: requirements around disclosure to the potential to scale up green and sustainable As it is common practice for green bond drive standardisation. At the EU level, across capital markets, issuers to disclose the use of proceeds to regulation on low carbon benchmarks, banking, fintech, insurance and investment.2 investors, definitions and standards are including Paris- aligned benchmarks, is Capital markets are where some of the most being developed in many jurisdictions currently being discussed.6 prominent developments in sustainable finance to help harmonise the eligibility criteria • Implementing best practice on disclosure have occurred in recent years – including of assets that are climate-aligned. The around sustainable investments and the emergence and rapid growth of “green European Commission has proposed the exposure to climate risks: Financial bonds” – bonds with proceeds dedicated to establishment of regulatory frameworks centre authorities can engage with investments with environmental benefits, from to facilitate sustainable investment and regulators and supervisors to encourage climate change mitigation and adaptation, to has constituted a Technical Expert Group action to strengthen market discipline air and water quality, biodiversity or coastal to advise on how such frameworks could relating to green finance – including conservation. Through the green label, be developed.4 Clear guidelines can also by requiring , investors and investments in assets aligned with a low- support foreign issuers that wish to raise financial to disclose exposure carbon and climate-resilient future have been green bonds overseas. to sustainable investments and climate made visible. In parallel, underlying definitions • Support public policy for sustainable finance: risks.7 The transparency and market and standards for green bonds have evolved, green bonds provide a tool to re- capital practices around green bonds disclosure breaking new ground for the development flows from brown to green through the can help build reporting requirements of other types of green finance instruments. existing market infrastructure. The public around sustainable investments. Considered as a case study of sustainable sector has played a catalytic role in the finance market development, the growth story

Climage-KIC is supported by the EIT, Financial Centres for Sustainability Europe & Green Bonds a body of the 1 The Green Bond Market in Europe

Globally, green bond markets have been Green bond issuance in Europe exponentially growing since 2012 – with 60 approximately USD500bn issued to date. Annual issuance of listed green bonds 50 reached USD167.3bn in 2018, with the target for 2019 set at USD300bn. As a region, 40 Europe hosts the largest green bonds market, with USD184.2bn worth of green bonds 30 issued (see chart). Europe has also pioneered several green bond 20 market segments: the first ever green bond was issued in 2007 by the European Investment 10 and labelled as Climate Awareness Bond; in 2012, the Île-de- region issued the Billions (USD) 0 first municipal green bond; in 2013 the Swedish property company Vasakronan issued the first UK France Latvia corporate green bond; and in 2016 Poland Norway IrelandPolandAustriaFinland Iceland BelgiiumDenmark LithuaniaPortugal Slovenia issued the first green sovereign. LuxembourgSwitzerland

Europe - green bond issuance by issuer type Europe - Use of Proceeds 2018

Loan 2% Local government Mixed 3% ICT >1% ABS 2.5% 3.5% Land Use 3% Industry >1% Waste 3%

Sovereign 15% Water Non-financial 4% corporate Energy 27% 45% Transport Government- 15% backed entity 23% Financial corporate Development Buildings 17% bank 22% 10%

Key highlights of sustainable finance policy developments in Europe Swedish Inquiry (Dec 2016): The Swedish Government appoints Article 173 (Jan 2015): France becomes the first country to pass an inquiry to promote the market for green bonds which a law introducing mandatory extensive climate change-related recommended a sovereign green bond issuance. reporting for asset owners and asset managers. Article 173 requires institutional investors to report on the integration of both UK Green Finance Taskforce (Sep 2017): The UK Government physical risks and ‘transition’ risks caused by climate change on establishes a Green Finance Taskforce to accelerate the growth of their activities and assets. green finance and deliver the investment required to meet the UK’s carbon reduction targets. Following the Taskforce’s final report in HLEG on Sustainable Finance (Dec 2016): The European March 2018, the British government commits to establishing a Commission establishes a High-Level Expert Group (HLEG) on Green Finance Institute, together with the City of . Sustainable Finance to provide advice on how to steer the flow of public and private capital towards sustainable investments, EC Action Plan on Sustainable Finance (Mar 2018): The European identify the steps that the financial institutions should take to Commission (EC) releases its Action Plan on Financing Sustainable protect the stability of the financial system from risks related to Growth with three subsequent legislative proposals on 1) the environment and deploy these policies on a Pan-European establishing an EU classification system for sustainable activities; scale. The HLEG releases two comprehensive reports in July 2017 2) incorporating sustainability in investor duties; 3) creating low- and January 2018. carbon benchmarks.

Climage-KIC is supported by the EIT, Financial Centres for Sustainability Europe & Green Bonds a body of the European Union 2 The Financial Centre Green Bond Ecosystem

Verifiers: An independent review Issuers: financial institutions, Policymakers: The European , central and local of green credentials of the bond is common practice in the European Commission has published governments, government- a 10-point Action Plan on backed entities market. Verifiers include firms and consultants with Sustainable finance which and environmental expertise includes a taxonomy for Investors: pension funds, sustainable activities, an insurance companies, financial EU Green Bond Standard institutions (commercial and and disclosure rules around central banks), investors; sustainable investing these include general bond investors or dedicated green ones Regulators: Regulation for green Stock exchanges: In Europe, London, bonds can be developed to , , , clarify definitions; disclosure and and Oslo have a climate-related risk management dedicated green bond list/segment can also be promoted by regulators; monetary policy Civil society: Environmental including prudential and and climate finance NGOs can collateral frameworks can also influence market players towards be designed to support low- creating a more sustainable future carbon investments

Green bonds as a tool to develop role as listing centres for domestic and and ExtraMOT (multilateral trading facility green financial centres in Europe international bonds, including for green dedicated to bonds) markets. bonds. Both exchanges are home to Sharing experiences around green finance In common with the LSE, it requires dedicated green bond segments. For green instruments, bringing clarity and convergence external reviews or second party opinions bonds to access the exchanges’ green on definitions, taxonomies and classification as part of eligibility criteria for bond listing. segments, issuers are required to submit systems, and building skills and capacity Additionally, Borsa Italiana has enabled the relevant documentation to ensure a degree through peer exchange have been identified identification of so-called climate-aligned of transparency with respect to the assets as strategic action points for the FC4S bonds through its ExtraMOT PRO, which being financed. Network. The following section aims to gather allows for identification of bonds that are not the experience of European financial centres The London green segment labelled as green or social but are issued by with green bonds to support these objectives. is currently home to 95 green bonds listed companies belonging to sectors supporting in several different currencies including INR, the transition to a low carbon economy. London, Luxembourg & SEK and MXN. The green segment offers Stockholm: Listing centres for ExtraMOT Pro is also the platform where issuers a flexible range of market models green bond issuance minibonds are listed on the Borsa Italiana. covering both Regulated Market (RM) and Minibonds are a fixed-income One of the first sustainable green bond Multilateral Trading Facility (MTF). Issuers instrument for unlisted companies, allowing markets was set up in 2015 on the Nasdaq are required to submit an external review these companies to access capital markets Stockholm with two sustainable green or second party opinion to verify the green and diversify their sources of funding from bond segments launched on the Stockholm of the bond. bank . 334 minibonds have been issued main market and on Nasdaq First North In 2016, the Luxembourg Stock Exchange on the Italian market to date for a total of Bond Market.8 To access the segments, launched the Luxembourg Green Exchange EUR 16.4 bn, more than 80% of which have issuers need to disclose information on use (LGX), the first platform worldwide to list an issuance size smaller than GBP 50m.9 of proceeds, present a third-party review exclusively green, social and sustainable There is the potential to explore green and and report annually until the full allocation bonds. The Luxembourg Stock Exchange is social bonds for this market segment and of proceeds. In 2018, Nasdaq Stockholm also home to the first Climate Awareness for Milan as a financial centre to combine its Sustainable Commercial Papers and Nasdaq Bond issued in 2007 by the European expertise around mini- and green bonds. Stockholm Sustainable Products were also Investment Bank. LGX listing requirements launched, listing sustainable commercial Paris and : centres for apply strict eligibility criteria, including pre- paper and structured products respectively, Sovereign Green Bond Issuance and post- issuance reporting. and highlighting further growth and 2017 was an important year for in the green and sustainable debt Milan: the climate-aligned sovereign issuance in the green bond space. markets. Nasdaq Stockholm is the main segment and minibonds In France, the green OAT has played a listing centre for green bonds issued out of Borsa Italiana has also established fundamental role in leveraging green bonds the Nordics. a dedicated green bond segment in 2017 to highlight Paris as a financial centre for Over the past few years, London and and lists green and social bonds on both sustainability. To date, France has issued Luxembourg have also established their its MOT (electronic fixed-income market) the largest sovereign green bond which

Climage-KIC is supported by the EIT, Financial Centres for Sustainability Europe & Green Bonds a body of the European Union 3 has raised just below EUR15bn. The bond issuer lead, with 20 green bonds issued since their commitment to green action and proceeds have been used to fund a variety 2014, amounting to more than USD270bn. sustainability. The Canton of of projects spanning across different sectors The green bond proceeds are primarily used issued its first local green bond in such as renewable energy, energy efficiency, to finance renewable energy generation from November 2017 raising USD610m to transport, land use and adaptation. The wind, solar and some hydro and biomass. finance the canton’s ten-year investment French sovereign green bond represents a KfW is committed to transparency, reflected plan, which includes enhancing energy landmark issuance as it sent a strong signal by their quarterly reports on the use of efficiency in buildings. The Züricher to the market as witnessed by several other proceeds raised via green issuance and their Kantonal Bank has also issued a green bond nations following suit during 2017. detailed annual impact reporting. in 2018, raising USD324m to finance or re- finance assets such as private, commercial France has also played an important role in Züricher Kantonal Bank & Canton and real estate as well as housing sub-sovereign green bond issuance, as it of Geneva: green sub-sovereigns cooperatives. Both issuers are committed is also home to the first local government Zürich and Geneva are using to report annually on proceed allocation as sustainability bond issued by Ile-de- sub-sovereign green bonds to signal well as impact. France back in 2012. The City of Paris has consolidated its commitment to sustainability by issuing a EUR300m sub-sovereign green Opportunities for financial centres & green bonds bond in 2015 aimed at funding projects in low- carbon buildings, transport, renewable energy Green bonds are an effective instrument • Green bond guidance: FC4S members generation and sustainable agriculture. Other for financial centres wishing to strengthen can consult with their members on the French sub-sovereign sustainability bonds their offering and competitiveness with need to develop guidance on green include issuance from Provence-Alpes-Côte respect to sustainable finance objectives. bonds in form of a general guide, d’Azur, Hauts-de-France and Department Though green bonds are a guidelines from stock exchanges or de L’essonne. State-owned railway company instrument, they are a good vehicle regulation from securities regulators. SNCF and state-backed energy utility to introduce some fundamentals of The development of a guide for green company EDF are also key actors in green sustainable finance into the financial centre bonds could even be commissioned by bond issuance, having issued multiple bonds ecosystem: environmental experts and FC4S members. raising EUR2.6bn and EUR30.4bn respectively civil society, green definitions, investor for financing of renewable energy production • Green bond training: FC4S members engagement and public policy support for and low carbon transport. can convene workshops and training wider sustainable finance initiatives. sessions for issuers, investors and Ireland also came to the market with its first Different parts of the financial centre verifiers through network partners such sovereign green bond issuance in October ecosystem can play an active role in as the Climate Bonds Initiative and the 2018 strengthening Dublin’s commitment, developing green bond markets: exchanges Frankfurt School. as a financial centre, to climate action and can develop dedicated green bond listing sustainability. The green bond is going to Peer-to-peer exchanges can also rules and explore new market segments; finance a wide range of eligible project be organised through the FC4S central and local governments and categories including water and wastewater Europe Network. development banks can be demonstration management, clean transportation, issuers; and regulators can implement • Sustainable finance committees: FC4S renewable energy and climate change regulations around disclosure and risk members can explore the of adaptation. Ireland plans to report annually management related to climate change risks. convening a dedicated sustainable finance on the proceeds allocation and every two committee or green finance initiative/ years on impact.10 FC4S Europe members have a significant taskforce comprising representatives from part to play in catalysing their stakeholders Frankfurt: a development their stakeholders to develop a common around green bond market development by bank story agenda around sustainable finance and exploring, through the resources offered by engage with regulators and policymakers Frankfurt’s financial centre green the Network membership and Partners, the accordingly. bond story stars the Frankfurt-based giant following opportunities: development bank KfW as a green bond

Endnotes 1 UNEP Inquiry, Corporate Knights (2017): Financial Centres for 6 For more information visit: https://ec.europa.eu/info/publica- Sustainability (http://unepinquiry.org/publication/financial-cen- tions/180524-proposal-sustainable-finance_en tres-for-sustainability/) 7 Paris is leading on this front with the implementation of Article 2 UNEP Inquiry (2017): Accelerating Financial Centre Action on 173; several regulators are looking at how to implement the Sustainable Development (https://docs.wixstatic.com/ugd/eb1f0b_ recommendations of the TCFD and the European Commission 5709d803e0fd49169124afe8e00f3765.pdf) has proposed a regulation on disclosures relating to sustainable 3 Retail investors can be an important source of sustainable investments and sustainability risks. finance given their direct interest in developing sustainable infra- 8 Nasdaq First North Bond Market is an alternative marketplace structure in their cities and regions. US green municipal bonds have which offers issuers more flexible admissions requirements and is been successfully issued for the retail market, thanks also to a therefore well suited for smaller issuers, private placements, and exemption on income from investments. retail bonds 4 For more information visit: https://ec.europa.eu/info/publica- 9 www.minibonditaly.it tions/sustainable-finance-technical-expert-group_en 10 See Sustainalytics (2018): Second Party Opinion Irish Sovereign 5 Climate Bonds Initiative (2016,2017, 2018): Scaling up green Green Bond bond markets for sustainable development; The Role of Exchanges in accelerating the growth of the green bond market; The green bond market in Europe.

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Climage-KIC is supported by the EIT, Financial Centres for Sustainability Europe & Green Bonds a body of the European Union 4