What the green bond market needs to grow

Author: | Published: 28 Aug 2018
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The market is gaining momentum with increased sovereign, supranational and corporate issuances, and growing government support

1 Minute read
The global green bond market continues to go from strength to strength, with strong support from governments, market participants, regulatory and industry bodies.

The introduction of the Sustainable Finance Legislative Proposals and other EU regulations will encourage the growth of a sophisticated market in Europe, while both the US and China markets continue to see sustained issuances. No green sukuk has been issued from the Middle East yet, however a number of sovereign-sponsored green initiatives should encourage the development of a robust Middle East green bond and sukuk market.

The green bond market has grown considerably since the first green debt instrument was introduced in 2007. The year 2017 saw over $160 billion of issuances and the introduction of the first green sukuk, with global issuances projected to reach between $250 and $300 billion in 2018 as more sovereigns, international agencies, government institutions and private corporations seek financing for their green projects and broaden their investor base. The past few years have also seen the growth of social and sustainable bonds, which come at a time when issuers are increasingly incentivised to issue green, social or sustainable debt to attract wider institutional investor demand for investment-grade products capable of meeting their short-term portfolio risk and yield requirements and their corporate social responsibility objectives.

The unique feature of any green bond is that the proceeds raised from bond sales are used for green projects. The most straightforward and common type of green bond is a use of proceeds bond, where proceeds are earmarked for eligible future green operations and projects. The world's first green bond – a Climate Awareness Bond issued by the European Investment Bank (EIB) was a bond whose proceeds were set aside for a range of eligible green projects focusing on renewable energy and energy efficiency, including funding an offshore windfarm in Belgium and solar PV systems in Italy.

While it is possible to fund specific projects, it is also possible for the proceeds to be used to finance unspecified present or future eligible projects that meet the criteria set out in the bond description or to refinance existing green projects. Other types of green bonds include green securitised bonds, which are collateralised by one or more green projects, with bond repayments coming from the cashflows of the assets.

Regulations and initiatives

With the growing interest in sustainable finance and in particular the green bonds market, various regulatory and industry bodies, both regional and international, have introduced guidelines, best practices and certification schemes to foster the orderly growth of the market; chief among these are the ICMA's Green Bond Principles (GBPs) and the Climate Bond Standards promoted by the Climate Bonds Initiative (CBI). On a governmental and market level, various exchanges and regulators have also introduced domestic policies to increase interest in green bond issuances.

Best practice guidelines – the Green Bond Principles

The GBPs, first issued by the ICMA in January 2014 and updated in June 2018, are a set of voluntary process guidelines that foster transparency and disclosure, and promote the development of the market by setting requirements for the issuance of a green bond. They provide guidance on four aspects of a green bond – use of proceeds, process for project evaluation and selection, management of proceeds and reporting. These guidelines mandate the documentation of the use of proceeds, environmental objectives and eligibility criteria in selecting projects, as well as transparency and clarity in tracking proceeds and annual reporting, as well as recommend the use of external reviews to confirm the alignment of the bond with the four core components of the GBPs. Eligible green projects are those that contribute to the five environmental objectives: climate change mitigation, climate change adaptation, natural resource conservation, biodiversity conservation and pollution prevention and control.

Largely mirroring the GBPs are the ASEAN Green Bonds Standards issued by the ASEAN Capital Markets Forum in November 2017, which provide more specific guidance on how the GBPs are to be applied across the ASEAN region to be recognised as ASEAN Green Bonds. One clear requirement is that the issuer or issuance must have a geographical or economic connection to the region. The ASEAN Standards also list out eligible projects for bond issuances, which explicitly exclude fossil fuel power generation projects. The GBPs' documentation guidelines also apply here, with the added requirement that the information be publicly accessible from a designated website. Going above and beyond, issuers are encouraged to report not just annually on allocation of proceeds, but to also describe the projects that are benefiting from the proceeds and the expected benefit/impact. While external reviews remain voluntary, if an external reviewer is appointed, its credentials and scope of review must be made publicly available from a designated website.

External reviews

The GBPs recommend issuers provide external reviews to assure investors of the bond issuance's compliance. External reviews may be provided by specialists, researchers, ratings agencies etc.

Eligible green projects contribute to objectives including climate change mitigation, natural resource conservation and pollution prevention and control

One of the more popular external review schemes is the Climate Bonds Standard and Certification Scheme administered by the CBI, with certified climate bonds accounting for 13% of the green bonds issued in the first six months in 2018. Under the CBI scheme, an independent verifier is appointed for each green bond to provide a verification statement that the bond meets the CBI Standards, with the bond documentation and statement also being reviewed by the Climate Bond Standards Board. The CBI Standards integrate and complement the GBPs, and the CBI's Climate Bonds Certified stamp of approval serves as a credible validation that an independent external review has taken place.

The Guidelines for Green, Social and Sustainability Bonds External Reviews were published in June 2018, to promote best practice in professional and ethical standards for external reviewers, and the organisation, content and disclosure requirements for the reports. Under these Guidelines, four types of external reviews may be obtained, including a second party opinion, verification against internal or external standards, certification by a recognised external standard or label, or a green bond rating from specialised research providers or ratings agencies.

Exchange initiatives

With the growing interest in green bonds, demand has also grown for market liquidity, and various exchanges and regulators globally have launched green bond-specific exchanges and promulgated initiatives to promote green issuances. The first dedicated green bond exchange, the Luxembourg Green Exchange, was set up in September 2016 and currently lists 50% of the world's green bonds, with a value totalling over $100 billion. Similarly, the London, Mexico, Shanghai and Shenzhen Stock Exchanges, and the Borsa Italiana, have also set up green bond listing segments. To complement the GBPs and the CBI Standards, the London Stock Exchange and Borsa Italiana both published guidance on environmental, social and governance (ESG) reporting for green bond issuers in February 2017, clarifying disclosure requirements for listing green bonds on the respective bourses.

Global developments

Global markets are increasingly attracted to the issuance of green bonds, and governments around the world have launched programmes, issuances and incentives to promote green finance. Poland became the first sovereign to issue a green bond in December 2016, while France issued the largest sovereign green bond to date of €7 billion ($8.1 billion approximately) in January 2017. Indonesia issued the first sovereign green sukuk in February 2018. Likewise, in its 2018/19 government budget, Hong Kong has announced plans for the world's largest sovereign green bond programme of up to $12.8 billion to finance green public works. The Monetary Authority of Singapore announced a green bond grant scheme in November 2017, providing up to S$100,000 ($73,150 approximately) as a subsidy for external reviews of green bonds. All such incentives and programmes aid the development of a robust green bonds market.


The EU issued the Sustainable Finance Legislative Proposals in May 2018 with a focus on financing sustainable growth. It is hoped that an agreement will be reached by the European Parliament and EU Council by May 2019 with delegated acts adopted between 2019 and 2022. The Proposals' aims are threefold: establish a unified EU classification system of sustainable economic activities, improve disclosure requirements on integration of ESG factors into risk processes and set up new category of benchmarks to assist investors in comparing carbon footprint of investments. Their ultimate goal is to formulate a taxonomy that can be integrated into EU law and applied across different areas by any EU or national regulator that devises requirements on financial products and corporate bonds (but not sovereign bonds), They would also apply to market participants that sell financial products as environmentally-friendly investments. This will form uniform criteria of four proposed tests that determine the environmental sustainability of promoted economic activities.

The Proposals also set out recommendations on consistent disclosure of how ESG factors are integrated in the issuer's risk processes and how its sustainable products achieve their targets. This entails the issuer to regularly publish on websites or disclose the method of incorporation, the elements of the risks, and the impact of such risks on the potential return. It is hoped that the introduction of these regulations allow for clarity and ease of comparison for investors.

There is considerable work that needs to be done before the Proposals can be finalised, most importantly how they will work with the GBPs, which at the moment are the market standard that issuers generally reference. There is no detail as yet on how existing issuers can ensure compliance with both the GBPs and the EU requirements, but it is hoped that the technical expert group appointed to assist the Commission in developing the taxonomy on environmentally-sustainable economic activities, and which includes market participants and the ICMA as members, will be able to work to provide more guidance on how the Principles would be integrated or work with the new measures proposed by the EU.

With the introduction of the EU's Packaged Retail and Insurance-based Investment Products (Priips) Regulation and the Prospectus Regulation (the majority of which is expected to come into force in 2019), European issuers need to take note of various considerations going forward. Priips references environmental disclosure and requires that key information documents (so-called KIDs) contain such details, along with information on the issuer's strategy for pursuing its identified environmental objectives and other relevant information to allow investors to make their own decisions having considered their own environmental or social objectives. While the onus is still on investors to be responsible for their own decisions, issuers will be expected to provide as much assistance as possible with full disclosure, transparency and sufficient specificity.

While the Prospectus Regulation is still under consultation and the current draft documents don't specifically provide details on disclosure of use of proceeds for green bonds, the ICMA has responded to the consultation welcoming the inclusion of use of proceeds as a standalone additional section in addition to the strictly prescribed information proposed to be set out in a Final Terms document under the consultation Regulation. This is in consideration that general use of proceeds is already commonly disclosed in debt prospectuses, and in particular specific disclosure is required for compliance with the Principles. The consultation documents also allow for wholesale issuances (but not retail bonds) to include disclosure of use of proceeds in their final terms, in which case, for green bonds this can be adapted to disclose the specific use of proceeds for green bonds.

The US

The US green bond market mainly comprises state or local government issuers or other large agencies which issue a significant amount of green bonds. Examples include Fannie Mae which in 2017 raised $25 billion of green mortgage-backed securities, or the State of California, whose green bond issuances have reached over $5 billion. Corporates, except the larger ones like Apple, tend to avoid the US market due to concerns that the stringent disclosure standards may be difficult to comply with under the Securities Act of 1933. That being said, as long as issuers provide sufficient disclosure on the general description on the underlying green activities, as well as risk factors, they should not be too concerned with their inability to meet disclosure requirements and avoid issuing in the US, particularly as the present indication is that US companies are becoming more involved in the green bonds market as compared to 2017.


China boasts a robust domestic green bond market, and was the second biggest market globally in 2017 with $23.1 billion of issuances. Bolstered by its commitment under its 13th Five-Year Plan (2016-2020) to reduce its carbon and energy intensity, China has announced various guidelines and policies developing the domestic market. Most recently, the China Securities Regulatory Commission released guidelines to encourage the development of green bond lists and indices on the Shanghai and Shenzhen exchanges. China also collaborated with international exchanges such as the Luxembourg Green Exchange to promote its domestic issuances.

There is sometimes a marked difference between domestic and international standards – including the scope of projects considered as green and the extent to which proceeds will be used for green purposes (present guidelines allow for state-owned issuers to use up to 50% of the proceeds to repay bank loans or as general working capital). But China is actively promoting the development of both its domestic and international green markets. The China Green Finance Committee and the EIB recently issued a joint paper demonstrating the potential to align domestic and international markets globally to meet investor demand.


In August 2014, Malaysia's Securities Commission issued its sustainable and responsible investment (SRI) sukuk framework to provide guidance on use of proceeds and eligible projects for an SRI sukuk. This captured projects that preserve and protect the environment and natural resources and imposing disclosure requirements. Under the auspices of the SRI sukuk framework, the world's first ringgit-denominated SRI sukuk was issued in May 2015. The framework is complemented by the Guidelines on Sustainable and Responsible Investment Funds which address utilisation proceeds and provides guidance on the eligible SRI projects. With the support of this framework, it is no surprise that the first private green sukuk was issued in July 2017 in Malaysia.

Middle East

At the moment there are no green sukuks from issuers in the Middle East, but the first green bond from the region was issued by the National Bank of Abu Dhabi (now First Abu Dhabi Bank) in March 2017. Given the various infrastructure and investment targets set by the countries in the region, it is expected that issuances will increase as local governments seek to raise funds for their projects (such as the Sheikh Mohammed bin Rashid Al Maktoum Solar Park in the UAE, set to be the largest single-site solar park in the world, the King Abdullah City for Atomic and Renewable Energy or the planned projects under Saudi Vision 2030). The UAE has also set itself exemplary targets for 2021 under the COP21 Paris Climate Agreement. As such, there are a number of sovereign-sponsored green initiatives that require financing and investment, which could be the trigger for the development of a Middle East green bond market.

Looking ahead

As the global green bonds market continues to develop, the World Bank is spearheading a shift from green to sustainable bonds. The move would help the focus not only be on environmental sustainability but also on social and sustainable development. Alongside the GBPs, the ICMA has published the Social Bond Principles and Sustainability Bond Guidelines in June 2018 to aid and encourage the issuance of these new products. But the green bonds market remains a popular investment market. With the development of new guidelines from the EU, market participants or other national/governmental agencies, more companies are expected to be interested in issuing, with more market players such as third-party verifiers and research institutes joining and governments being encouraged to implement green finance policies.

Paola Leocani
Simmons & Simmons (Milan)
  Lee Irvine
Simmons & Simmons (Dubai)
  Victoria So
Simmons & Simmons (London)

The authors would like to extend special thanks to Samir Safar-Aly (supervising associate, Simmons & Simmons LLP, Dubai), for having shared with them his extensive knowledge on the topic of green sukuk and socially responsible investments. He is also author of 'Green Sukuk: The Introduction of Islam's Environmental Ethics to Contemporary Islamic Finance' in the Georgetown International Environmental Law Review (2014), the first academic publication on green sukuk.