On Thursday, June 16, ICMA released the third version of the Green Bond Principles (GBP).
This update comes at the right moment as last year’s issuance was the largest ever, topping USD 42 billion in total green bond placements. Recent market developments in China, India and Mexico signal further growth opportunities and also highlight the necessity of continual updates to the Principles. For 2016, current green bond issuance is slightly above USD 30 billion and on pace for another record setting year, with optimistic targets of USD 70 billion by year end. As the green bond market continues to evolve, there is clear market demand for increased transparency and impact reporting.
The recently published version of the Green Bond Principles contains three important updates that deserve special attention.
- Issuance Templates: The most important update is designed to improve issuer transparency on the use of proceeds. The GBP Resource Centre now provides green bond market participants with two useful templates:
- The ICMA Information Template is designed to better inform the market by allowing issuers to describe a bond offering’s alignment with the four underlying pillars of the Green Bond Principles.
- The External Review Framework allows for the standardization of information provided by independent party reviewers.
Introduction of the templates is a significant step in increasing green bond comparability and transparency. Each template requires a detailed explanation for each GBP section and provides alignment overview with the GBP. The External Reviewer Template serves to improve comparability between multiple reviews, which can be diverse in their overall evaluation approach. Use and submission of these templates is voluntary, but issuers should utilize these well-vetted templates as a way to improve communication with market participants. This revised approach toward the GBP makes it apparent that the ICMA will continue to update the templates in the future.
- Project Eligibility: Certain existing categories have been merged and slightly redefined in order to cover additional eligible projects. Specific examples are given for each category so that the categories are easy to understand and are applicable to a wide range of issuers—even those companies with minimal sustainability track records. The GBP 2016 update also introduced a new category in order to extend to corporate issuers that are keen to develop environmentally friendly, eco-labeled or certified products. Current list of categories encompass various “shades of green,” i.e. some bonds may yield higher positive environmental impact than others. This allows the opportunity for issuers to engage the green bond market and pursue a range of outcomes, an important observation made in past meetings of the GRESB Green Bond Working Group.
- GBP Social Bond Guidance: Prior issues from the likes of FMO and Starbucks illustrate that there are issuers which seek to include one or more social criterion in their bond offerings. The ICMA’s decision to provide guidance for social bond issuers is designed to help grow this market segment. The guidance explains the main principles, project categories and alignment features, while providing examples of target populations. It also suggests that it is possible to release a hybrid bond which incorporates green bond categories alongside social aspects. A recent example for such a blend is the green bond issued by Hemsö Fastighets AB. Each scope individually is common in green property bonds, but the inclusion of social aspects with traditional sustainable ones is what makes Hemsö Fastighets’s offering stand out compared to others.
GRESB Green Bond Guidelines for the Real Estate Sector
GRESB will issue an updated version of the GRESB Green Bond Guidelines (GBG) for the Real Estate Sector during the latter half of 2016 that will incorporate recent updates to the Green Bond Principles combined with feedback from prior GRESB Green Bond Working Group meetings. Similar to the feedback obtained by ICMA, GRESB members underscored the need for increased transparency, comparability and cooperation among market participants. Discussions within the working group emphasized that such transparency may be achieved through robust reporting combined with specific information on selection criteria and decision making. This type of information would provide the necessary reassurance to capital market participants that the project selection and management process is systematic and that sustainability experts are involved.
The inclusion of various ESG criteria as extra KPIs within the green bond framework will likely help issuers improve the project selection process. For example, green bonds issued in 2015 by Unibail-Rodamco take a closer look at the development and well-being of the communities connected to particular projects. This example suggests that in the future green property bonds may broaden to also include social KPIs. Issuers should indeed take their corporate social or governance programs into account when pursuing a green bond, as feedback from prior GRESB GBWG sessions identified that connecting overall corporate sustainability objectives to a specific green bond may be beneficial. Bundling an issuer’s social objectives along with their overall sustainability record provides necessary background information for investors to assess the issuer’s readiness to achieve positive impacts. Thus it is important to align the green bond framework with entity’s sustainability objectives.
Commitment to regular and robust reporting underlines a green bond issuer’s dedication to achieving positive impact. At the close of 2015, a group of leading financial institutions suggested a noteworthy reporting framework that is useful to issuers—the ICMA included this framework in the recent Green Bond Principles. Prior green property bond examples, including BerlinHyp, Stockland, Regency Centers and Unibail-Rodamco, suggest that issuers are capable of providing robust reporting on environmental impacts. However, it is also important to note that approaches, assumptions and calculation methods are still not thoroughly explained, thus limiting comparability of green bonds.
The 2016 update to the Green Bond Principles will definitely improve transparency in reporting, and the guidance found in the ICMA Green Bond Resource Centre will help standardize green bond comparability in all types of industry sectors spanning Aerospace to Water Utilities. For property companies, the GRESB Green Bond Guidelines for the Real Estate Sector will incorporate these updates while providing specific industry guidance to ensure investor transparency on issuer objectives.