S&P Global Ratings Green Michael Wilkins Managing Director Global Infrastructure Ratings Copyright 2016 by S&P Global. All rights reserved. Bond Evaluation Tool Live Webcast Tuesday, 25 th October 2016
Growth in Issuance of Green Bonds Transparency of environmental impact is critical to unlocking potential capital supply Annual issuance by issuer type Issuance Categories 70 60 To be Defined Energy Buildings & Industry Billion $USD 50 40 30 20 10 Bank Corporate ABS Muni Development Bank 9 29 6 6 0.75 0.1 49 15 15 6 5 4 2 2 Transport Water Waste & Pollution Agriculture & Forestry MS Energy MS Buildings & Industry MS Transport MS Water 0 2012 2013 2014 2015 2016 YTD MS: Multi-sector (49% of bonds cover more than one sector) MS Waste & Pollution Source: Climate Bonds Initiative 2
Comprehensive Impact Evaluation Proposes to go beyond existing assessment tools and takes a local, sector specific view Draws on, but not limited to, green bond principles and existing taxonomies Includes analysis of governance and use of proceeds Focus on both adaptation and mitigation Evaluation of projects lifecycle impacts. Based on local conditions baseline Within sector/technology, looks to identify and rank relative to best in class Establishes a hierarchy across technologies depending on their contribution to the green transition Scores and weights individual component scores in a transparent manner 3
S&P Global Ratings Proposed Green Bond Evaluation Approach Transparency Governance (Mitigation Adaptation Use of proceeds reporting Reporting comprehensiveness Management of proceeds Impact assessment structure Buildings, Industrial Efficiencies, Energy Infrastructure, Transport and Water Increased resilience ekpis Carbon Water Waste Land Use Air and Water Pollution ekpis Reduction in financial and nonfinancial damage Net Benefit Local Baseline Best in Class Hierarchy Overlay Comprehensive Environmental Impact (Final score weighted aggregate) * ekpi Environmental Key Performance Indicator 4
Suggested Hierarchy Role in green transition Technology Systemic decarbonization of economies Wind power Solar power Small hydro Large hydro Energy management and control Significant decarbonization of key sectors through low-carbon solutions Decarbonization by alleviating emissions in intensive industries Decarbonization technologies with significant environmental hazards Green transport apart from hybrid/fuel efficient vehicles Green buildings new built best standards/net zero Industrial efficiencies Green transport (with fossil fuel combustion) Green buildings refurbishment/new built lower standard Energy-efficient products Nuclear, Large Hydro in tropical areas Environmental Impact Improvement of fossil fuel based activities' environmental efficiency Coal to natural gas Clean fuel production Clean use of coal 5
Proposed Hierarchy Assessment Suggested qualitative overlay Score 18 16 14 12 10 8 6 4 Illustrative Example of Hierarchy Assessment Overlay Score 20 15 10 5 0 Wind Power Bonds - Best in Class Comparison Wind Bond 1 Wind Bond 2 Project Category Wind Bond Wind Bond 3 4 Environmental impact score Hierarchy Assessment 2 0 Clean Coal Green Buildings Solar Energy Wind Energy Environmental impact score Hierarchy Assessment Project Category 6
Geographic Relevance Simplified example: a GB that finances a wind farm project in Germany (diversified generation mix). Project s carbon benefits Best-in-class scoring A wind farm in China (coal-based mix) A wind farm in Germany Sector hierarchy scoring Systemic Decarbonisation A wind farm in France (decarbonized mix) Private & Confidential 7
Proposed Scoring Aggregating sub-scores into an overall bond evaluation score Potential score final format (E1 to E5) Weighted score Score by category (hypothetical weighting) Private & Confidential 8
Global Market Consultation As Of Oct 19 In-person discussions with more than 40 large investors ($20T AUM) In-person meetings with marquee corporate clients (>30 ) 50+ survey respondents Over 50 respondents responded to the Green Bond survey, with each question garnering over 40-59 responses Presentations at high-profile forums: (at > 15 global events) Influencer & media engagement with a wide range of organizations Private & Confidential 9
Robust Media Coverage To-Date 30+ citations, 4 op-eds, 4 interviews and video appearances Private & Confidential 10
GBE Methodology Proposal Received Mostly Favorable Feedback September 2 2016 61 Respondents (individual questions answered by 40 59 respondents) October 19 2016 Consultation Starts Question 1 Question 2 Question 3 Question 4 Question 5 Question 6 Question 7 Question 8 Should all relevant project types and initiatives be available for assessment under the Evaluation, or should some be excluded? (56 responses) Do you agree that green energy, green transport, energy efficiency, and green buildings projects are the best categories of projects for the Evaluation to focus on initially? (59 responses) Should the proposed Green Bond Evaluation cover adaptation? (47 responses) Do you agree that the adaptation and mitigation categories, if both are relevant, should be combined into a single score? (48 responses) What format of score would be the most useful for you in terms of the overall Green Bond Evaluation? (40 responses) - Do you agree that a net benefit approach is the most appropriate methodology for determining mitigation? (44 responses) Do you agree that our proposed Green Bond Evaluation should use a sector level hierarchy as an overlay to the mitigation score? (43 responses) Should the mitigation scores be capped for certain types of projects? (40 responses) Private & Confidential 11
Adaptation Methodology Miroslav Petkov Director Financial Institutions Copyright 2016 by S&P Global. All rights reserved.
Adaptation Assessing the resilience benefit of green bonds Resilience Ratio Adjustment for Quantification Approach Final Evaluation Resilience Ratio is defines as : Reduction in Expected Damages GB Proceeds Notching of ratio score up or down based on S&P view of the quantification approach Ratio score with notching adjustment Score 1 Best 2 3 4 5 Worst + 1 no change 1 R1 Best R2 R3 R4 R5 Worst Private & Confidential 13
Next Steps Analyse feedback and decide on actions required as a result of the consultation phase Produce final methodology paper outlining the decisions made and the final framework for the tool Private & Confidential 14
Q&A
Thank you Michael Wilkins Managing Director Global Infrastructure Ratings T: +44 (0)20 7176 3528 mike.wilkins@spglobal.com Lydia Harvey Senior Analyst Trucost Lydia.Harvey@trucost.com Miroslav Petkov Director Financial Institutions T: +44 (0)20 7176 7043 miroslav.petkov@spglobal.com 16
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