INTRODUCTION TO GREEN BONDS FOR IDB INNOVATION LAB · 7/1/2019 · » Sustainalytics principal...

Sustainalytics: Green Bond Essentials

Trisha Taneja

March 28, 2019

INTRODUCTION TO GREEN BONDS FOR IDB INNOVATION LAB

Agenda 1

2

Case Studies

3

4

Appendices

Sustainalytics’ Second-Party Opinion Process

Introduction to Sustainalytics

Green Bond Essentials

5

Why issue green bonds?

Introduction to Sustainalytics

Sustainalytics

4

» Sustainalytics is the largest pure-play investment

research and ratings provider dedicated to RI and ESG

research

» 25 years of experience in the fields of ESG & corporate

governance research & analysis

» 400+ professional staff with more than half engaged in

research

» Offices around the globe, providing local market

knowledge

© 2019 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY

Who We Are

Sustainalytics Sustainable Finance Solutions

5

What We Do

» Sustainalytics principal business is to support hundreds of the world’s foremost investors to incorporate Environmental, Social, and

Governance (ESG) insights into their investment decision making processes.

» The Sustainable Finance Solutions team provides services tailored for issuers, corporates and the banks whom support them, to help

them integrate sustainability into capital raising activities.


Investor Solutions Sustainable Finance Solutions for Issuers Civil Society & Academia

ESG Ratings Index Services Green, Social & Sustainable Bonds

ESG Ratings License for Issuers

» Sustainability Research & Rankings

» Academic Program

» ESG Integration

» Screening and sustainability benchmarking of portfolios

» Thematic Investing for fund or index creation

» Engagement and Voting

» Strategy Development (ESG Integration, PRI Implementation)

» Provision of ESG data to create best-in-class or thematic indexes

» Label your issuance as green, social, or SDG through a second-party opinion from Sustainalytics

» Confirm to investors that projects financed post-issuance are aligned with the bond framework

» Report on impact of projects financed through your issuance to investors

» Commercialize ESG ratings for use in debt or equity instruments

» Create an ESG rating

» Benchmark sustainability performance relative to peers

» Competitive intelligence on ESG score

Sustainalytics

6

▪ 400 employees across our 13 global offices.

▪ Dedicated green/social bonds team, with 8 analysts spanning Americas, Europe, and Asia-Pacific.

▪ More than 450 investor clients worldwide.

▪ Deep understanding of global investor expectations.

Strong local presence with access to global investor insights

▪ Collaborative approach that communicates investor expectations to issuers.

▪ Named among Most Impressive Second Opinion Providers in the GlobalCapital Bond Awards in 2015, 2017, 2018.

▪ Recipient of Green Bond Pioneer Award by the Climate Bonds Initiative, recognizing international leadership in green finance.

Collaborative approach and award-winning services

▪ Experience working with commercial banks, corporates, municipalities, and sovereign issuers.

▪ Track record in new and emerging markets such as Mexico, India, Brazil.

▪ Strong experience with securitized debt transactions.

Experience with a variety of issuers and markets

Global Sustainable Finance Expertise


Sample Bond Clients

7

100+ projects from diverse issuers across the globe


South America• Bancoldex Green Bond• Banco Nacional de Desenvolvimento

Econômico e Social (BNDES) Green Bond

• BRF S.A. Green Bond• CMPC Green Bond • Fibria Green Bond• Suzano Papel e Celulose S.A. Green

Bond

Asia-Pacific• City Developments Limited • Development Bank of Japan

Sustainability Bond• DBS Green Bond• Greenko Green Bond• Jain Irrigation Systems• Korea Development Bank Green Bond• Mitsubishi UFG Green Bond• National Australia Bank Limited Social Bond• QBE Insurance Group Green Bond

North America• American Municipal Power Inc.

Green Bond• Apple Inc. Green Bond• Kaiser Foundation Hospitals Green Bond• New York MTA Green Bond• Mexico City Government (CDMX) Green

Bond• Nacional Financiera Green & Social Bonds• Port of Los Angeles Green Bond• Port of Long Beach Green Bond• State of Connecticut Water Revolving Fund

Green Bond• SFPUC Green Bond • Sound Transit Green Bond• Starbucks Corporation Sustainability Bond• University of Vermont Medical Center Green

Bond• Ygrene Energy Fund Green Securitized

Bond• Renovate America Green Bond

Africa• African

Development Bank Social Bond

Europe• Alpha Trains Green Bond• BNG Bank Social Bond• Castellum Green Bond• Credit Agricole CIB Green Notes• Comunidad de Madrid• Council of Europe Development

Bank Social Bond• Fabege AB Green Terms• FMO Sustainability Bond• ICO Social Bond

• Kutxabank Social Bond• Kommunalkredit Social Bond• Lloyds Helping Britain Prosper

Bond• Obvion N.V. Green Storm• NWB Bank Social Bond• Republic of Poland Green Bond• Repower Green Bond• Shanks Group Plc Green Bonds• Sainsbury Green Loan• TSKB Sustainability Bond

China• Tianjin Rail Transit• Beijing Capital Group

Hong Kong• Link REIT• MTR• Swire Properties• New World Development• Hong Kong and China

Gas Ltd.

Why issue green bonds?

What are Green Bonds?

9© 2019 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY

Bonds where the “use of proceeds” are clearly earmarked for green projects like renewable energy, energy efficiency, water sustainability, or green buildings.

SOCIAL BONDS

Annual reviews by Sustainalytics

and ongoing reporting

Second Opinion performed by Sustainalytics

Information disclosure to

external reviewer

Develop Framework

Initial Portfolio/Project

review

Bond IssuanceSelect Underwriter

Steps for Green Bond Issuance:

Why issue a green bond?


To diversify issuerInvestor base

This is an appealing value

proposition for our customers

who are trying to diversify for

greater subscription and

price/volume stability.

https://www.cbd.int/financial/greenbonds/ifc-greenbonds2017.pdf



To enhance awareness of environmental

efforts

Most first time issuers cite this

as their primary interest – to

highlight important work that

they are doing to address

sustainability goals that are

often diluted by other aspects of

their business.




To meet investor demand

“Potential demand from investors is extremely high. Investors with over US$60 trillion of assets under management have made public commitments to make responsible investments, and green bonds can help them to achieve their pledges.” UNDP

http://www.undp.org/content/sdfinance/en/home/solutions/green-bonds.html


Who buys Green, Social and Sustainable Bonds?



Key drivers for increasing demand:

➢ Government policies requiring or incentivizing

more investment in Social, Green and

Sustainable

➢ Increasing Retail and Private demand for

sustainable investment (i.e. requirements for

sustainable intents)

➢ Climate change impacts to investors

➢ There is a big demand for green bonds from

emerging markets due to the IFC- Amundi Planet

Green Fund

➢ $2 billion fund created specifically to invest

in emerging market green bonds.

http://www.climateaction.org/press-releases/ifc-amundi-to-create-worlds-largest-green-bond-fund-dedicated-to-emerging-m

Green Bond Essentials

Investor Expectations from a Green Bond

15

Impact Assessment

Transparency

ESG Assessment of Issuer

Investors’ Expectations

• Assessment of expected positive environmental and/or social impact

• Contribution to the SDGs

• Management of proceeds

• Allocation of proceeds

• Reporting

• Contribution of green bond to issuer’s sustainability strategy

• Ability of the issuer to mitigate E&S risks

Green Bond Principles capture Investor Expectations

16

Four Pillars of the Green Bond Principles act as Guidance for Issuers


1.

Use of Proceeds

2.

Process for Project

Evaluation /Selection

3.

Management of Proceeds

4.

Reporting

» Are the projects aligned with a long-term

transition to a low-carbon economy?

» Are the proceeds financing impactful projects

as per market norms?

» Is there an internal process/person responsible

for ensuring projects are selected as per the

eligibility criteria in the framework?

» Are disbursements being tracked to green

projects?

» Is the amount of green capital raised equal to

the value of green assets?

» Is the issuer able to disclose allocation to and

impact of green projects financed (post-

issuance)?

Is my project green?


Is the project aligned with a long-term transition to a low-carbon economy?

» Any activity or product that, in a low-carbon economy is

obsolete, unviable, prohibitive and even illegal can be

considered not aligned with a long-term transition (aka

brown). Examples:

» It is involved in the extraction, production, distribution and/or use of

fossil fuels

» It improves the longevity of fossil fuel use

» It results in more use of fossil fuels or fossil fuel related products,

» It makes fossil fuel more accessible

» It makes fossil fuel more cost effective or cheaper

» It transitions from high intensity fossil fuel to a low intensity fossil

fuel

Dark Brown Light Brown Light Green Dark Green

[View 1] Brown and Green are part of the same spectrum: any project that reduces emissions is eligible for a green bond

Dark Brown Light Brown

Light Green Dark Green

[View 2] Brown and Green are on different spectrum: brown projects may reduce emissions but only green projects can help transition to a low-carbon economy

Is my project green?

18

Assessment Rationale for the investor Benefit to the investor

Step 1: Does the project create positive impact as per market norms?

Provides the investor with the trust that the positive impact is meaningful and in alignment with objectives set.

Allows the investor to demonstrate positive impact

Step 2: Does the issuer have measures to manage and mitigate Environmental and social risks

Provides the investor with the trust that the project does not have unintended negative impact or is at high risk of controversies

Provides the investor with assurance that potential negative impact is managed, avoiding reputation risk

Two-step Impact and Risk Methodology



Green Real Estate and Infrastructure Projects

Common Use of Proceeds, Eligibility Criteria and Best Practices

» Certified Green Buildings

» Nationally or internationally recognized certification schemes (Singapore BCA Green Mark, HK Beam Plus)

» Best practice is top two levels of certification (Gold, Platinum or equivalent)

» Investors want to see high threshold for impact

» Lower levels of certification (Silver) possible depending on local context

» Energy Efficiency

» Best practice is to disclose threshold of energy efficiency achieved

» No specific threshold is considered high impact, but investors value transparency and want to see more than incremental improvements in

efficiency

» Climate Change Adaptation

» Invest in resiliency of buildings against effects of climate change (e.g. flood defense)

» Best practice is to demonstrate that such investments are undertaken in response to specific climate risk assessment studies

» Clean Transportation

» Invest in mass transit infrastructure and vehicles (railways, BRT, etc.)

» Water and Wastewater management

» Invest in reuse and harvesting of rainwater, water infrastructure upgrades to reduce leakage, drain maintenance and upgrade, etc.

Case Studies

Sample Green Bond Project


Banco de Desenvolvimento de Minas Gerais (BDMG) Green Bond , 2018

» BDMG’s Green Bond had 7 use of proceeds categories

» Pollution Prevention and Control, Water and Effluent Management, Renewable Energy, Biofuels,

Energy Efficiency, Clean Transportation, Natural Resources Management

» Clean Transportation category included:

» Acquisition of any type of hybrid and electric vehicles for passenger (buses) or cargo transportation;

» Acquisition of lightweight electric vehicles;

» Recharge infrastructure for renewable fuel or electric charges for hybrid and electric vehicles;

» Infrastructure for mass transit transportation including train, subway, electric bus and BRT Standard

Bronze, Silver or Gold from the Institute for Transportation and Development Policy

» “Sustainalytics recognizes that some BRT systems may deploy fossil fuel-powered vehicles;

although electrified transit provides the greatest environmental benefits, the expansion of mass

transit more broadly has an overall positive impact regardless of fuel source.”

» Other infrastructure projects were included under water management:

» Treatment of residual waters, sewage and rainwater;

» Infrastructure for the collection and treatment of drinking water;

» Reuse of rainwater.

Sample Green Bond Project


Prologis Inc., 2018 Green Bond

» Prologis issued two green bonds in 2018

» Framework applicable to all Prologis subsidiaries and entities

» Use of Proceeds were green buildings, energy efficiency, and renewable energy

generation

» While top 2 levels of certifications are considered highest threshold of impact for

residential and commercial buildings, the size and scale of logistics facilities

meant third level of certifications were well received by investors

» Prologis Japan’s green bond included certifications specific to the Japanese local

context (e.g. DBJ and CASBEE Green Building Certifications)

» Sustainalytics’ SPO provided international investors with confidence on the impact of

regional certification schemes.

» Use of proceeds contributed to Prologis’ corporate sustainability strategy to

reduce emissions:

» Prologis has targets around renewable energy generation and a track record of

certifying its logistics facilities

Sample Green Bond Project- Real Estate


Link REIT 2016 Green Bond

» Context

» Hong Kong is a land-locked city-state with limited capacity for renewable

energy generation

» Given this context, buildings are an important source of GHG emission

reduction for HK

» Link REIT has clear corporate targets around reduction of GHG emissions,

waste and water management

» Use of proceeds included:

» Green buildings certified to LEED Silver, Gold, or Platinum or NABERS 3

certification

» Given the high density, urban environment of HK, LEED Silver was

considered sufficient, despite not being the highest threshold

Other relevant case studies


A full list of Sustainalytics’ projects can be found on:

https://www.sustainalytics.com/sustainable-finance/our-work/

https://www.sustainalytics.com/sustainable-finance/our-work/

For more information, please contact:

www.sustainalytics.com

Trisha TanejaProduct Manager and Head of Sustainable Bonds

+1-647-317-3695

Sustainable Finance Solutions

[email protected]

Appendices

Sustainalytics’ Second-Party Opinion Process

27

A typical engagement includes


Step 1

Kick-off Meeting

• Understand issuer’s bond and sustainability objectives

• Understand eligibility criteria and eligible projects (scope)

• Understand management and reporting process

• Identify relevant documents for evaluation

Step 2

• Evaluate use of proceeds, eligibility criteria and eligible projects

• Evaluate process of management of proceeds

• Evaluate KPIs and reporting process and frequency

• Assess alignment of the bond with sustainability strategy

• Draft an opinion

Evaluation Feedback

• Provide draft document to client

• Receive feedback

• Provide updated draft document to Sustainalytics’ Sustainability Bonds Review Committee

• Receive feedback from client and the review committee

• Set up follow-up call if required

Step 3

Final Document

• Finalize evaluation

• Update opinion

• Receive client sign-off

Step 4

Marketing

• Provide marketing support during roadshows and investors meetings

• Coordinate press release

Step 5

Annual Reviews

• Review projects financed by green bond to ensure compliance with framework

• Review impact reporting to ensure it aligns with commitments in framework.

Post-issuance (optional)

Step 6

Copyright © 2017 Sustainalytics. All rights reserved.

Part of this presentation may contain Sustainalytics proprietary information that may not be reproduced, used,

disseminated, modified nor published in any manner without the express written consent of Sustainalytics. Nothing

contained in this presentation shall be construed so as to make a representation or warranty, express or implied,

regarding the advisability to invest in or include companies in investable universes and/or portfolios. The information

provided in this presentation is not intended to be relied upon as, nor to be a substitute for specific professional advice

and in particular financial advice. The information is provided “as is” and, therefore Sustainalytics assumes no

responsibility for errors or omissions. Sustainalytics accepts no liability for damage arising from the use of this

presentation or information contained herein in any manner whatsoever. This presentation is not contractual.

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