On 14th January 2020, the EU Commission presented the EU Green Deal investment plan, aimed at driving at least €1 trillion of sustainable investments over the next decade. The ultimate objective was to engage all stakeholders (public and private organisations) in placing the environment at the top of their agenda. A commitment by the EIB to end fossil fuel energy projects by 2022 and unlock the trillion-euro investments, has been taken seriously considering the unprecedented coverage of the UN COP26 in Glasgow this year. As reported by Simon Mundy, Gillian Tett and Kristen Talman in a special coverage of COP26 in the Financial Times, it looks as though the summit fell “short of achieving the serious global breakthroughs needed to tackle the climate crisis.” However, a month following the summit ESG initiatives, and the changes required to facilitate implementation of the principles in business permeates through all key sectors, with the financial sector being at the forefront. As reported in the FT “there seems to be an emerging consensus on the need to substantially expand and strengthen existing carbon pricing mechanisms — and to create entirely new ones — to align businesses' and consumers' economic incentives with the drive for a lower-carbon economy. Expect increasingly tough scrutiny of the voluntary carbon offset market, and a more prominent debate around the rollout of carbon tax regimes”. ( https://www.ft.com/content/ef49bd75-46aa-4952-8116-b616e599357c)
Green Bonds: definition, issuers and objectives:
The EC defines Green Bonds as “any type of listed or unlisted bond or capital market debt instrument issued by a European or international issuer that is aligned with the European Union Green Bond Standard (EU GBS).” Green Bonds are structurally linked to the issuer's fulfilment of climate goals or wider sustainable development goals. The major objective of the rollout of the Green Bonds is to participate and facilitate the transition to clean energy within the timeframes set by the EU.
Key drivers for Green Bond issuance:
There are several opinions as to what drives the booming issue of Green Bonds, in addition to the attention placed by the EU and its 2022 and 2030 climate change commitments. Some financial experts consider that the popularity, is driven primarily by investors embracing socially responsible investing, and not a better risk and return potential over conventional bonds. Or the possibility of tax incentives (depending on the issuer and jurisdiction), such as tax exemption and tax credits. What is important to note however, is that the idea of ﬁnancing renewable projects through green bonds “is even more important since institutional investors, in particular pension funds and asset managers, have been considering the possibility of including sustainable environmental investments in their assets. As such, “sustainable investing” now accounts for more than one quarter of total assets under management (AUM) in the United States and more than half in Europe,” as reported in an excellent book by Baldacci, B. and Possamaï, D. titled “Governmental incentives for green bonds investments” published on 5th January 2021.
According to an IENE presentation by Ms. Irene Terzidou presented at the 25th National Energy Summit in Athens on 1st and 2nd December 2021, 30% of the EU's €800 billion Covid-19 recovery scheme called NextGenerationEU, which gives grants and loans to member states until end of 2026, will be raised through the issue of Green Bonds. The proceeds will be used to finance green investments and reforms. In October 2021, the EC issued the first NextGenerationEU Green Bond worth €12 billion, as Ms. Terzidou states, the world's largest Green Bond to date!
Who can issue Green Bonds and what's the procedure?
- Private companies provided they're authorised by the by-laws, and especially those that are active in energy, renewable energy, alternative energy sources;
- Financial institutions, such as commercial, investment and development banks;
- National Governments.
Green Bond issuance is regulated at EU level by the European Securities and Markets Authority (“ESMA”) and at Cyprus level, by the Cyprus Securities and Exchange Commission that has published a paper on key terms of sustainable finance (https://www.cysec.gov.cy/en-GB/cysec/sustainable-finance/). It is vital that a Green Bond is certified as such, before it can benefit from any incentives offered by the EU or national governments.
Steps for issuing Green Bonds:
- Pre-issue step:
- Define the Green Bond Term-sheet;
- Check for support mechanisms.
- Issue step:
- Draft all key investor documents and investment materials, referring specifically to the green attributes of the relevant bonds.
- Post issue step:
- Proceeds allocation to the various projects;
- Supervise projects and track proceed allocation;
- Publish the impact report;
- Perform a post-issue audit if so required.
The certification process for Green Bonds includes:
- Identification of the assets that will comprise the Green Bonds and drafting of the Term-sheet;
- Engaging an approved verifier that the said bonds will meet the Climate Bonds Standard requirements;
- Submit Verifier's report to receive certification Pre-Issue. Then issue the Green Bonds under the Certified Climate Bond mark;
- Confirm the Verifier's report within 24months of issue post-issue;
- Report annually.
It is noted that the Institute of Energy for South-East Europe (IENE) became the first organisation in Greece and South-East Europe to be granted Approved Verifier status under the Climate Bond Standard.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.