Online learning series: Green bonds an innovative and efficient way of financing green investments Module II: Setting up a green bond framework GIZ & SEB Strategic Alliance on Green Bond Market Development
Webinar II: Setting up a green bond framework Content & learning objectives The Green Bond Principles The five pillars of a green bond framework Use of proceeds Process for project evaluation and selection Management of proceeds Reporting External review The steps of a green structuring process Market aspects & transaction considerations Market access Liquidity Pricing Allocation Marketing Webinar II: Setting up a green bond framework 1
Part 1: The five pillars of a green bond framework Webinar II: Setting up a green bond framework
Recap: What is a green bond? Green Bond Definition Green bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects and which are aligned with the four core components of the Green Bond Principles Same underlying mechanisms as regular bonds Main difference is that only predefined projects can be financed Green Bond Frameworks ensure that green projects are defined and that the issuers deliver on their promise Webinar II: Setting up a green bond framework 3
The Green Bond Principles Use of proceeds Process for project evaluation and selection Management of proceeds Reporting External review Definitions of eligible projects Mitigation Adaption Environmental Key to obtain sufficient knowledge Traceability and monitoring Transparency Impact reporting At least annualy Evaluation through an independent external assessment Green Bond Framework Definitions and procedures Webinar II: Setting up a green bond framework 4
lease for inclusion in Volvofinans Bank s Green Loan Portfolio (as defined below). Final version Volvofinans Bank s Green Bonds can be used to finance new Eligible Projects and to refinance Eligible Projects in accordance with the Green Bonds Framework. 17 March 2017 3. SELECTION OF ELIGIBLE PROJECTS 17 March 2017 1. EARMARKED ACCOUNT Eligible Projects will be selected in consensus by the Head of Treasury An amount and the equal Head to of the net proceeds of the green bonds ( Green Bonds ) issued by Sustainability Departments (i.e. both departments have a veto). Approved Volvofinans loans and Bank leases AB will (publ) ( Volvofinans Bank ) will be credited to a special account be included in 1. Volvofinans EARMARKED Bank s ACCOUNT green loan portfolio ( Green Loan Portfolio ). Eligible Projects ( Special Account ) The ambition must meet the criteria which are valid at the time of approval of the loan or lease for inclusion in that Volvofinans will support Bank s Volvofinans Green Loan Bank s Portfolio Eligible (as Projects defined below). (as defined below). Example An of amount a equal to the bond net proceeds - of Volvofinans the green As long bonds as the ( Green Bank is that the Green Loan Portfolio at all times will be larger than the amount of outstanding Green Bonds ) are outstanding issued by and the Special Account has a positive balance, at Bonds from Volvofinans Volvofinans Bank. The Bank share Bank AB of (publ) Green AB ( Volvofinans (publ) Bond financing Bank ) of the the Volvofinans Green will end be of Loan every credited Bank s Portfolio fiscal Green to quarter, a special Bonds funds can account will be be used deducted to finance from new the Eligible Special Projects Account and to added refinance to will be specified in the ( Special annual Green Account ) Bonds that investor will support letter, Volvofinans see section 4 Bank s Volvofinans (Transparency). Eligible Eligible Projects Bank s Projects in lending accordance (as pool defined with an below). the amount Green equal Bonds to Framework. all disbursements from that pool made As long as the Green Bonds are outstanding and the during Special such Account quarter has in a respect positive of balance, Eligible at Projects. Until disbursement to Eligible Projects, the 3. SELECTION OF ELIGIBLE PROJECTS the end Green of every Bonds fiscal Framework quarter, funds will be deducted Special from Account the Special balance Account will be and placed added in Volvofinans to Bank s liquidity reserve. The vast majority 4. TRANSPARENCY Volvofinans Bank s lending pool in an amount equal of Eligible to the all reserve disbursements Projects consists will of from be covered selected that pool bonds in made consensus and municipal by bonds. the Head of Treasury and the Head of during such quarter in respect of Eligible Projects. Until disbursement to Eligible Projects, the To enable investors to follow the development Volvofinans Bank AB (publ) and provide insight 2. to prioritised ELIGIBLE Sustainability areas, PROJECTS Departments (i.e. both departments have a veto). Approved loans and leases will Eligible Projects must meet the criteria which are valid at the time of approval of the loan or Special Account balance will be placed in Volvofinans Bank s liquidity reserve. The lease for vast inclusion in majority Volvofinans Bank s Green Loan Portfolio (as defined below). Volvofinans Bank will provide an Final annual version Green Bonds investor letter which be will included include in the Volvofinans Bank s green loan portfolio ( Green Loan Portfolio ). The ambition Volvofinans Bank s Green Bonds can be used to finance new Eligible Projects and to refinance of the reserve Green consists Bonds Framework of covered bonds and municipal bonds. Eligible Projects in accordance with the Green Bonds Framework. following items. Eligible is that the Projects Green Loan means Portfolio a selected at all pool times of will loans be larger and leases than the to vehicles amount of that outstanding are funded, Green in 3. SELECTION OF ELIGIBLE PROJECTS Final version whole Bonds or from in part, Volvofinans by Volvofinans Bank. Bank The share and that of Green promote Bond the transition financing to of low the Green carbon Loan and climate Portfolio Eligible Projects will be selected in consensus by the Head of Treasury and the Head of 2. ELIGIBLE PROJECTS Sustainability Departments (i.e. both departments have a veto). Approved loans and leases will 1. A description of the Green Loan Portfolio including: resilient will be growth, specified as in determined the annual be included by Green in Volvofinans Bonds Bank s green loan investor Bank. portfolio ( Green letter, Loan Portfolio ). see The section ambition 4 (Transparency). 17 March 17 2017 is that the Green Loan Portfolio at all times will be larger than the amount of outstanding Green Eligible Projects means a selected pool of loans and leases to vehicles that Bonds are from Volvofinans funded, Bank. The in share of Green Bond financing of the Green Loan Portfolio will be specified the annual Green Bonds investor letter, see section 4 (Transparency). (a) impact reporting at portfolio level; Such vehicles shall represent sustainable transportation defined as passenger vehicles which: 1. EARMARKED ACCOUNT whole or in part, by Volvofinans Bank and that promote the transition to low carbon and climate An amount equal to the net proceeds of the green bonds ( Green Bonds ) issued by 4. TRANSPARENCY resilient Volvofinans Bank growth, AB (publ) ( Volvofinans as determined Bank ) will be credited by to Volvofinans a special account (b) information Bank. ( Special about Account ) the that will support maturity Volvofinans profile Bank s Eligible of Projects the (as defined Green below). Loan 4. Portfolio; TRANSPARENCY meet the criteria as specified by Paragraph 11 a of Chapter 2 of the Swedish Road To enable investors to follow the development and provide insight to prioritised areas, 1. EARMARKED ACCOUNT As long as the Green Bonds are outstanding and the Special Account has a positive balance, at Volvofinans Bank will provide an annual Green Bonds investor letter which will include the the end of every fiscal quarter, funds will be deducted from the Special Account and added to Traffic Tax Act (Sw. following Vägtrafikskatelag(206:27) items. ( Environmental Friendly Cars ) (c) information Such Volvofinans about vehicles Bank s lending the pool shall average in an amount represent equal share to all disbursements sustainable of the from total that pool made value transportation of the To vehicles defined enable as passenger vehicles which: during such quarter in respect of Eligible Projects. Until disbursement to Eligible Projects, the 1. A description of the Green Loan Portfolio including: (Sw. investors the Miljöbilar) Green to 1, follow and; the development and provide insight to prioritised areas, An amount equal to the net proceeds of the green bonds ( Green Bonds ) issued by Special Account balance will be placed Volvofinans Bank s liquidity reserve. The vast majority Loan Portfolio that (a) impact reporting at portfolio level; of the reserve has consists been of covered financed bonds and municipal by bonds. Volvofinans Bank; and Volvofinans Bank will provide an annual Green Bonds investor letter which will include the Volvofinans Bank AB (publ) ( Volvofinans meet the criteria Bank ) as specified will be by credited Paragraph to a 11 special a of Chapter account 2 of the Swedish (b) information about Road the maturity profile of the Green Loan Portfolio; 2. ELIGIBLE PROJECTS following can items. be powered entirely or partially by non-fossil fuels, i.e.: (c) information about the average share of the total value of the vehicles in the Green ( Special (d) Account ) information that Eligible will about Projects support Traffic means the a selected share Volvofinans Tax pool Act of of loans Green (Sw. and leases Bank s Vägtrafikskatelag(206:27) to Bond vehicles that Eligible financing are funded, Projects of the Green (as defined Loan ( Environmental below). Portfolio. Friendly Cars ) Loan Portfolio that has been financed by Volvofinans Bank; and whole or in part, by Volvofinans Bank that promote transition to low carbon and climate As long as the Green Bonds resilient are growth, (Sw. as outstanding determined Miljöbilar) 1 by Volvofinans and Bank., and; the Special Account has a positive (d) information about the share of Green Bond financing of the Green Loan Portfolio. 1. A balance, description o electric at of vehicles the Green Loan Portfolio including: Such vehicles shall represent sustainable transportation defined as passenger vehicles which: 2. A selection of Eligible Project examples.a summary of Volvofinans Bank s Green Bond the 2. end of A every selection fiscal of quarter, Eligible funds Project will examples.a be deducted summary from the of Volvofinans Special Account Bank s and Green added Bond to development. meet the criteria as specified by Paragraph 11 a of Chapter 2 of the Swedish Road Traffic can Tax Act (Sw. be Vägtrafikskatelag(206:27) powered entirely ( Environmental or partially Friendly Cars ) by non-fossil fuels, (a) i.e.: o impact fuel cells reporting vehicles Volvofinans at Bank portfolio recognises the importance level; of impact reporting. Volvofinans Bank undertakes Volvofinans development. Bank s lending pool (Sw. Miljöbilar) in 1, and; amount equal to all disbursements from that pool made to include information in the Green Bonds investor letter about the reduced carbon footprint of the funded Eligible Projects at portfolio level in relation to relevant reference values. can be powered entirely partially by non-fossil fuels, i.e.: during Volvofinans such quarter Bank in recognises respect of o electric vehicles o electric/petrol The Green hybrid Bonds investor vehicles letter as well as the use proceeds, tracking and management of o electric the Eligible vehicles importance Projects. of impact Until disbursement reporting. Volvofinans to Eligible Bank Projects, (b) undertakes information the about the maturity profile of the Green Loan Portfolio; funds will be assured by Volvofinans Bank s designated compliance functions. The Green Special Account balance will be o placed fuel cells vehicles in Volvofinans Bank s liquidity reserve. The vast majority Bonds investor letter and the opinion of the compliance function will be made publically to include information in the Green available on Volvofinans Bank s web page, www.volvofinans.se. o electric/petrol o Bonds hybrid fuel vehicles of the reserve consists of covered bonds and cells investor municipal vehicles letter about the reduced carbon footprint bonds. (c) o information electric/diesel of about hybrid the average vehicles the funded Eligible Projects share of the total value of the vehicles in the Green o at electric/diesel portfolio hybrid vehicles level in relation to relevant reference values. o ethanol/petrol o hybrid electric/petrol vehicles hybrid vehicles Loan o Portfolio ethanol/petrol that has hybrid been financed vehicles by Volvofinans Bank; and 2. ELIGIBLE The Green PROJECTS Bonds investor o letter biogas/natural as gas well vehicles as the use of proceeds, tracking and management of o biogas/natural gas/petrol vehicles o electric/diesel hybrid vehicles (d) o information biogas/natural about gas the vehicles share of Green Bond financing of the Green Loan Portfolio. Eligible funds Projects will be assured means by a Volvofinans selected pool Bank s of loans designated and leases compliance to vehicles functions. that are The funded, Green in 1 If criteria develop over time or if the referenced legislation is amended or superseded with respect to whole Bonds or in investor part, by letter Volvofinans and the Environmental Friendly Cars, Bank opinion the definition of Environmental Friendly Cars for the purpose of Eligible Projects o and of ethanol/petrol that the promote compliance hybrid the function transition will vehicles to be low made carbon 2. publically A and selection o climate biogas/natural of Eligible Project gas/petrol examples.a vehicles summary of Volvofinans Bank s Green Bond shall be amended accordingly. resilient available growth, on as Volvofinans determined Bank s by Volvofinans web page, Bank. www.volvofinans.se. development. o biogas/natural gas vehicles Such Webinar vehicles II: Setting shall up represent a green bond sustainable framework transportation defined as passenger Volvofinans vehicles which: Bank recognises the importance of impact reporting. Volvofinans Bank undertakes o biogas/natural gas/petrol vehicles 1 If criteria develop over time or if the referenced legislation is amended or superseded with respect to 5
The five pillars of a green bond: Definition A concept of simplicity built on five pillars Self-defined Pre-defined Definition Use of Proceeds + - + - Good flexibility Large range of Universal May be rigid definitions FIND CHINA S GREEN PRODUCT Efficient and May discourage Encourages May require indepth CATALOGUE comparable communication communication knowledge Certificates PEFC/ FSC BREEAM/LEED Webinar II: Setting up a green bond framework 6
1. Definition: Case study - Kommuninvest Webinar II: Setting up a green bond framework 7
The five pillars of a green bond: Selection A concept of simplicity built on five pillars Committee w/ veto right Limited mandate Training certificate Definition Use of Proceeds Selection Process for project evaluation Webinar II: Setting up a green bond framework 8
2. Selection: Case study - Kommuninvest Webinar II: Setting up a green bond framework 9
The five pillars of a green bond: Monitoring A concept of simplicity built on five pillars Earmarked account Definition Selection Monitoring Balanced earmarked account Virtual green balance sheet Use of Proceeds Process for project evaluation Management of proceeds Webinar II: Setting up a green bond framework 10
3. Monitoring: Case study - Kommuninvest Webinar II: Setting up a green bond framework 11
The five pillars of a green bond: Reporting A concept of simplicity built on five pillars Financial Return Sustainability Return Definition Use of Proceeds Selection Process for project evaluation Monitoring Management of proceeds Reporting Transparency External List of areas financed review Allocated amounts Brief Assesment description through of projects external Expected impact evaluation Webinar II: Setting up a green bond framework 12
4. Reporting: Case study - Kommuninvest Webinar II: Setting up a green bond framework 13
The five pillars of a green bond: External review A concept of simplicity built on five pillars Assessment of sustainability aspects Verification of procedures Second opinion Audits Ratings External Review Certification Second Opinion CICERO (ENSO) DNV GL Oekom Sustainalytics External review Credit Rating S&P Moody s Assesment through external evaluation Webinar II: Setting up a green bond framework 14
4. External review: Case study - Kommuninvest Second Opinion on Kommuninvest s Green Bond Framework 27th March 2018 Webinar II: Setting up a green bond framework 15
Part 2: The steps of a green structuring process Webinar II: Setting up a green bond framework
The steps of a green structuring process Step Action Responsibility 1 Kick-off meeting with relevant representatives from finance, Issuer & structural environment/sustainability, legal and communications departments advisor 2 First draft green bond framework for the issuer Structural advisor 3 Tailor the framework to match the ambitions and preferences of the issuer Issuer & structural advisor 4 Prepare information package to the independent external reviewer, potentially including: Environmental vision, goals, strategies and policies (external and internal) Internal working guidelines Information on technologies Routines for impact measurements Issuer (with guidance from the structural advisor) Webinar II: Setting up a green bond framework 17
The steps of a green structuring process cont. Step Action The framework and information package are sent to the independent external 5 reviewer 6 A draft external review and a set of questions is delivered by the external reviewer Responsibility Structural advisor Independent external reviewer Response to the independent external reviewer 7 Answers to the questions (+extra material and/clarifications if needed) Adjustments to framework (if desired) Issuer (with guidance from the structural advisor) 8 A call is arranged with the independent external reviewer and the issuer Structural advisor 9 Final external review is delivered Independent external reviewer 10 Issuer (with guidance Prepare communication strategy, investor presentation, transaction strategy and from the structural open a separate account advisor) 11 Investor road show followed by the inaugural green bond transaction issuer (with guidance from the structural advisor / underwriter) Webinar II: Setting up a green bond framework 18
Part 3: Market aspects and transaction considerations Webinar II: Setting up a green bond framework
Market aspects and transaction considerations Five market aspects to consider: Market access Liquidity Pricing Allocation Marketing Webinar II: Setting up a green bond framework 20
Market access Investor diversification Number of investors Geographical reach Issuance flexibility Maturity Currency Volume Format Source: Green bond pricing in the primary market: October - December 2017 Prepared jointly by the Climate Bonds Initiative and the International Finance Corporation. Webinar II: Setting up a green bond framework 21
Liquidity Poor Asymmetric Frustration and loyalty Webinar II: Setting up a green bond framework 22
Pricing Primary market Secondary market New issue premiums for green bonds in our sample, 2016 & 2017 23% 45% On the curve Inside curve Outside curve 32% Source: Green bond pricing in the primary market: October - December 2017. Prepared jointly by the Climate Bonds Initiative and the International Finance Corporation. Source: Green bond pricing in the primary market: October - December 2017 Prepared jointly by the Climate Bonds Initiative and the International Finance Corporation. Webinar II: Setting up a green bond framework 23
Allocation Extract from Deal Review Investor Allocations Green 24% 63% Light Green Dark Green Source: Green bond pricing in the primary market: October - December 2017 Prepared jointly by the Climate Bonds Initiative and the International Finance Coreporation Webinar II: Setting up a green bond framework 24
Marketing Investors want to be seen in public advertisments Press releases Webinar II: Setting up a green bond framework 25
Part 4: Wrap-up Webinar II: Setting up a green bond framework
Module II: Setting up a green bond framework Learnings The Green Bond Principles The five pillars of a green bond framework The steps of a green structuring process Market aspects & transaction considerations What s next Webinar 3: Safeguarding: Definitions, impact reporting & external review Webinar II: Setting up a green bond framework 27
Module 2: Setting up a green bond framework More information ICMA: The Green Bond Principles 2018 Impact Reporting: Green Bonds Working towards a Harmonized Framework for Impact Reporting (Dec 2015) Nordic Public Sector Issuers: Position Paper on Green Bonds Impact Reporting (Oct 2017) Case study: Kommuninvest Green bond framework Second opinion Impact report Climate Bonds Initiative: Green Bond Pricing in the Primary Market (Q4 2017) Webinar II: Setting up a green bond framework 28
How to contact us Ben Powell, Senior Banker, Climate & Sustainable Finance, SEB T: +47 2282 6675 E: ben.powel@seb.no I: www.seb.se/mb Harald Francke Lund, Head of Second Opinions, CICERO T: +47 996 45 324 E: hfl@cicero.oslo.no I: www.cicero.oslo.no Christine Majowski, Project Manager, Sustainable Finance, GIZ T: +49 6196 79 7277 E: christine.majowski@giz.de I: www.emergingmarketsdialog.org www.developpp.de Webinar II: Setting up a green bond framework 29