Green, social and sustainable bond market developments

Market performance

Global issuance of green bonds continues to grow strongly. Preliminary data for H1 2018 indicates that compared to H1 2017 global issuance grew 21% to US$85 billion (source: SEB, unless stated). Growth was robust in early Q3, with issuance at end-August passing $97 billion (+19% year-on-year). Significantly, cumulative green bond issuance closed around US$500 billion at end-August, reflecting improving liquidity and portfolio diversification opportunities.

In H1, issuance from corporates and financials grew especially well (+40% to US$44 billion and more than double to US$27 billion respectively). So far this year, issuance volume has become more evenly balanced between SSAs and corporate/financial issuers, although agency ABS/MBS tips the balance in favour of SSAs. Fannie Mae, which in June announced a new green bond framework aligned with the GBP, led securitisation and wider green bond market volumes in H1 with issuance of a remarkable US$10.2 billion.

Renewable energy continued to be the largest use of proceeds at 48%, followed by green buildings and sustainable transportation at 26% and 14%, respectively.

Geographically, issuance remained diverse, coming from no less than 34 jurisdictions (as of end-August), including three new countries - New Zealand, Iceland and Lebanon. The top five slots were obtained by the US, China, supranationals, France and Belgium. The regional picture shows impressive growth in issuance, on a rolling 12-month basis, in multiple regions – including North America, Europe and Asia ex-China (see Figure 1 below).

Figure 1: Last Twelve Months Analysis by Region (US$ billion)

Leading issuance currencies were correlated with the geographic picture set out above as well as global bond market flows, with EUR (40% year to end-August) and USD (34%) dominating, followed by CNY (13%). The exceptional role of Scandinavian issuers was reflected by SEK taking fourth place (6%).

The social and sustainability bond segment has also been growing, with amounts outstanding now at $44 billion by end H1. Social bond flows in H1 2018 totalled US$ 4.7 billion, with outstandings reaching US$15 billion, whilst sustainability bonds were somewhat more popular, with flows of US$7.5 billion, taking outstandings up to US$29 billion.

GBP SBP Executive Committee priorities

The GBP SBP Executive Committee held a physical meeting, kindly hosted by the EBRD in London on 20 September 2018, to consider its 2018/19 priorities. The forthcoming annual consultation’s main themes and timelines were identified during the session. GBP SBP members and observers will be asked for their feedback by the second half of November 2018. The Executive Committee also discussed potential updates to the governance of the Principles.

It was confirmed that the six following working groups and taskforces will pursue their tasks during the next months: Index and Database; Green Projects Eligibility; Impact Reporting; Social Bonds; New Markets and Research. The Terms of Reference of those working groups and their expected deliverables will be made publicly available in the coming weeks.

Additional feedback on the themes of this meeting have been given to GBP SBP members on a conference call held on 5 October 2018.

Tokyo conference

ICMA and the Japan Securities Dealers Association (JSDA) will hold their second joint Conference on Developments in Green and Social Bond Markets on 11 December 2018 in Tokyo. This follows the exceptional response to the first such conference last year, with around 500 registrations. It also responds to the momentum of the market in this region. In Asia, the Asia-ex-China region has grown most rapidly in the past 12 months, with issuance growing almost 300% to US$14 billion (to end-August 2018). China remains the largest market in Asia, with close to US$30 billion issued in the last 12 months.

Capacity building: training initiatives

ICMA has built on its well-established executive education platform, with over 40 years of experience, as well as its experience from hosting the platform for the Green & Social Bond Principles, to develop a new training course dedicated to introducing green, social and sustainability bonds. After launching in March this year, four public courses have been held so far, 3 in London and one in Hong Kong. These courses have been fully booked. They are in a 1-2 day classroom format, providing hands-on knowledge and including a range of case studies. The courses are led by experienced market and training professionals working with ICMA. Looking ahead, in line with other ICMA training courses, ICMA is responding to demand from members for tailor-made courses and will be holding a series of such courses in Asia this autumn.

Contacts: Nicholas Pfaff, Valérie Guillaumin and Peter Munro nicholas.pfaff@icmagroup.org valerie.guillaumin@icmagroup.org peter.munro@icmagroup.org

European Technical Expert Group on Sustainable Finance

The European Commission released on 8 March an Action Plan on Sustainable Finance that follows many of the recommendations of the High Level Expert Group (HLEG) on Sustainable Finance. In order to support the implementation of its Action Plan, the Commission further announced on 13 June the establishment of the Technical Working Group on Sustainable Finance (TEG) on which ICMA, represented by Nicholas Pfaff, has been nominated following a highly selective process. The main tasks of the group are to assist the Commission in the development of:

• an EU taxonomy of environmentally sustainable economic activities;

• an EU Green Bond Standard;

• a category of “low carbon” indices for use by asset and portfolio managers as a benchmark for a low carbon investment strategy;

• metrics allowing improving disclosure on climate-related information.

In addition to ICMA, the members of the group represent a wide variety of financial and economic actors as well as non-governmental agencies and academics. Several European and international institutions contributing to the development of sustainable finance have also been invited as members or observers to the group. They include among other representatives from the European Supervisory Authorities, the European Central Bank, multilateral development banks (such as the European Investment Bank and the European Bank for Reconstruction and Development), the Central Banks and Supervisors Network for Greening the Financial System and the Organisation for Economic Co-operation and Development.

The TEG has held three plenary meetings since its inception in early July 2018. Its mandate will run until 30 June 2019, with possible extension until the end of 2019. At this early stage and with reference to its published status, the progress and orientations of the TEG can be summarised as follows:

• The future EU taxonomy, commencing with definitions of environmentally sustainable activities, will build on similar, existing market-led and Member State-based initiatives. Its objective among others is to facilitate the achievement of the EU’s mid- and long-term greenhouse gas (GHG) emissions targets and environmental policy objectives by encouraging capital flows to environmentally sustainable economic activities. The taxonomy will serve as the basis for the future establishment of standards and labels for sustainable financial products.

• The EU Green Bond Standard (GBS) will draw on the EU taxonomy and will refer to an external verification process envisaged as is common practice for green bonds in the EU market already today. Discussions regarding the granularity of requirements placed upon the verification process and the scope of the EU GBS are ongoing. Given the relatively well-developed EU market for green bonds, the EU GBS could focus on maintaining and reinforcing market integrity and establishing the basis for a recognised international standard.

• Benchmarks play a central role in the price formation of financial instruments and provide a useful tool for investors, as they allow tracking and measuring performance and for allocating assets accordingly. Existing ESG benchmarks are seen as lacking transparency with regards to their methodologies and fund managers pursuing a low-carbon or Paris-aligned investment strategy may lack a reliable index to benchmark their performance against. The work on the low carbon benchmarks is focused on selection criteria, data needs, and weighting methods for underlying assets of such benchmarks. This includes determining the key elements of minimum standards for low-carbon and positive carbon impact benchmarks. The importance of ensuring the comparability and reliability of data used for the construction of these benchmarks has also been underlined. The proposed low-carbon benchmark (LCB) would be used for risk diversification and the positive carbon impact benchmark (PCIB) for investing with impact.

• The starting points for the work on climate-related disclosures are the existing guidelines to the Non- Financial Reporting Directive (NFRD) and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The work of the TEG will build on and further develop the TCFD recommendations. For example, the group has also taken up the challenge of identifying disclosure metrics that could give meaningful information about the impact a company has on climate change. Both climate change mitigation and adaptation are part of the scope.

Reflecting its engagement and support for the Green, Social and Sustainability Bond market and its key role in providing the Secretariat for the GBP & SBP, ICMA is involved as a priority in the discussions on the future EU GBS and on its link with the EU Taxonomy. We are stressing, among other things, that the work on the EU GBS should avoid accompanying regulatory initiatives that could have possible unintentional negative outcomes such as the crystallization of liabilities and/or additional costs. It is important to underline that the international green, social and sustainable bond market already benefits from a very effective global self-regulatory initiative, coordinated by the Executive Committee of the GBP & SBP, that provides a full range of guidance for market participants including guidelines for issuance, reporting and external reviews.

In parallel, ICMA is monitoring aspects of the Commission’s plans such as for investor duties that may impact more particularly its buyside members. The Commission held a public consultation on this topic that closed in January 2018. The Commission aims now to prepare delegated acts regarding the duties of institutional investors and asset managers. EIOPA and ESMA have been invited to provide technical advice for these delegated acts by 30 April 2019. The delegated acts for which the Commission seeks technical advices by EIOPA and ESMA would introduce level 2 amendments under UCITS, AIFMD, MiFID II, Solvency II and IDD with “the aim of incorporating sustainability risks, ie environmental, social and governance risks in the decisions taken and processes applied by financial market participants subject to those rules”. ICMA’s Asset Management and Investors Council is creating a sustainability contact group to follow specifically these potential developments as well as others related to the Commission’s Action Plan.

Contact: Nicholas Pfaff nicholas.pfaff@icmagroup.org