Green Bonds: Revolutionising Debt Capital Markets
05 March 2020
The climate crisis and societal challenges such as rising inequality are generating a momentum for change in the world of business and politics. This is demonstrated by the commitment, at the 50th meeting of the World Economic Forum in Davos, by 140 of the world’s largest companies to support efforts to develop a core set of common metrics and disclosures of non-financial factors to their investors and stakeholders, called “Stakeholder Capitalism.”
The chief executive officers increasingly see topics of environmental, social and governance (ESG) and sustainable development goals as important to long-term business value creation.
In this evolving global context, governments, institutions and corporations are increasingly issuing green bonds to increase market appeal to a broader investor class and to be environmentally and socially responsible.
Green bonds explained
Green bonds are, generally, debt securities whose issuance proceeds are ring-fenced and exclusively applied to the finance or re-finance of new and/or existing projects that will promote progress on environmentally sustainable activities. However, there has been international criticism of the green bond market with some questioning the green credentials of certain bonds – such as “clean-coal” projects in China. There is a concern that “greenwashing” is occurring due to the absence of a globally accepted definition of what can be termed a green bond and what are environmentally sustainable activities. Greenwashing is understood to mean an unsubstantiated claim to deceive or mislead consumers into believing that a product is environmentally friendly.
The EU has taken the lead in developing a general assessment framework in respect of environmentally sustainable activities (not specific to green bonds). An action plan was created and it has developed a “taxonomy to understand whether an economic activity is environmentally sustainable”. EU member states approved the initial version of the taxonomy in December 2019. The taxonomy’s guidelines and classifications will enable institutions to assess whether an activity is environmentally sustainable. It is proposed that the taxonomy disclosures will be phased in over the next couple of years.
The EU has introduced two new climate-related benchmarks: the EU Climate Transition Benchmark and the EU Paris-aligned Benchmark. The main objectives of the new climate benchmarks are to (i) allow a significant level of comparability of climate benchmark methodologies, (ii) provide investors with an appropriate tool that is aligned with their investment strategy, (iii) increase transparency on investors’ impact, specifically with regard to climate change and the energy transition, and (iv) disincentivise greenwashing. However, while this is a progressive step the Commission is still to develop an EU green bond specific standard and it remains to be seen how these will impact the market.
In Ireland, in order to be eligible for inclusion in the “Euronext Green Bonds” initiative, the green bonds must be aligned with recognisable industry standards such as International Capital Market Association's (ICMA) Green Bond Principles or Climates Bond Initiative 'Climate Bonds Taxonomy', which is a separate and distinct taxonomy from the EU's. They must also be accompanied by an appropriate external review performed by an independent third party.
Green bonds have historically been issued by multilateral lenders such as the World Bank, the African Development Bank and the European Investment Bank. However, the Irish Government is at the forefront of the sovereign green bond movement, having raised €3 billion through the issuance of an ‘Irish Sovereign Green Bond’ in October 2018 (being only the 4th European sovereign to do so at the time) and a further €2 billion in October 2019. These bonds are issued in connection with the Irish Sovereign Green Bonds Framework, which is published by the National Treasury Management Agency. The net proceeds of these issuances are to be allocated to the finance or refinance of eligible green projects in Ireland in accordance with the framework. These projects primarily address sustainable water and wastewater management, clean transportation, environmentally sustainable management of living natural resources and land use, renewable energy, built environment/energy efficiency and climate change mitigation/ adaptation. The first annual allocation report was published in accordance with the framework on 26th June 2019. Overall, €1,949 million was allocated to Eligible green projects as at end-2018, an amount equal to 65.3% of the proceeds of the inaugural Irish green bond issue. There is strong overseas demand for these bonds, with 95% of the first issuance being distributed to non-Irish investors and the majority of the second issuance also going overseas.
According to the Climate Bonds Initiative, in 2019 a new global record of $257 billion of green bonds was issued worldwide, this is an increase of 51% on 2018’s annual amount. However, to put this figure in context, there was a total of $1.34 trillion worth of bonds (green and non-green) issued in 2018 worldwide. The European green bond market saw an increase of 74% year-on-year and accounted for 45% of global issuance. However, the OECD calculates that a total of $6.9 trillion (across all sources of finance, including green bonds) is needed annually to meet the Paris Agreement goals. If the Paris Agreement goals are to be achieved, this rapid growth and use of green bonds will need to continue (and increase).
Listing Green Bonds in Ireland
Ireland offers a number of advantages when issuing green bonds:
The stock exchange in Dublin - Euronext Dublin, part of the Euronext Group - is the world’s number one venue for bond listing. The Euronext group lists 46,000 debt securities, issued by issuers from 90 jurisdictions.
The Euronext group hosts “Euronext Green Bonds”, which is a dedicated community of green bond issuers where eligible green bonds listed on all Euronext locations are consolidated onto one highly visible area allowing issuers to showcase their ESG credentials and giving investors a transparent discovery process.
Euronext Dublin offers quick turnaround times (a maximum of 3 business days for the first offering document review, and a turnaround of two business days for follow on reviews). Staff are highly responsive and accessible for direct discussion of listing and regulatory queries.
Listing on the Global Exchange Market (GEM) of Euronext Dublin’s regulated market can facilitate the payment of interest without any withholding tax by relying on the quoted Eurobond exemption. A “quoted Eurobond” is defined as a security that is quoted on a recognised stock exchange and carries a right to interest.
With the projected global increase in green bond issuance in the coming years, together with the continued attractiveness of doing business in Ireland, any issuer should consider listing in Ireland.
Our Debt Capital Markets & Listing team has considerable experience in listing bonds in Ireland. Contact us for more information.
This article was contributed by Samuel Monteith, Associate and Daragh O'Shea, Partner.
The content of this article is provided for information purposes only and does not constitute legal or other advice.